Why You Shouldn't Convert to a Roth IRA - WSJ.com

Interesting piece from the Wall Street Journal.

What I have found in conversations with clients is the decision to convert is never totally obvious.

The best candidates for conversion, in my opinion, tend to be older, usually widowed clients, who are looking to reduce their estate tax burden as well as give their heirs more assets tax-free. By converting to a Roth, and paying the taxes now, you take funds out of your estate to pay the taxes, which means the estate tax burden could conceivably be less. Moreover, the beneficiaries of the Roth will receive tax-free distributions, assuming all of the various Roth conversion rules are followed.

In other cases, however, it can be more complex, as this article suggests.

The whole piece is worth a read (it really isn't that long) but here are the five reasons cited:

1. The tax bite is too big.

Clients often come to advisers asking about the Roth IRA conversion opportunity without realizing the immediate tax implications: They will have to pay income tax on any money they move out of a traditional IRA into a Roth account.

2. Retirement is too close.

The problem here is that it can take 15 to 20 years for the tax-free growth of a Roth IRA to make up for the taxes paid at the time of conversion, advisers say. And that period can be extended if the investor starts withdrawing money from the account. That makes conversion an iffy proposition for people who are nearing retirement.

3. The investor's savings are too concentrated.

Age is even more of an issue for investors who are looking to their IRAs as their primary source of income in retirement. That's because they will need to take distributions from the fund sooner than investors who have other resources, and in larger installments—leaving less time for investment gains to offset the conversion's initial tax bite.

4. Tax brackets often change in retirement.

Interest in conversions is being spurred by anticipation of higher tax rates ahead. Some investors figure they will come out ahead by converting to a Roth IRA now and paying taxes at current rates on the amount they transfer, rather than leaving their money in a traditional IRA and paying taxes at a higher rate when they make withdrawals in the future.

But there's a catch in that scenario: Most people fall into a lower tax bracket when they retire.

5. The income can change your tax bracket now.

If an investor is receiving Social Security benefits, the spike in income could force them to pay taxes on their Social Security money, he says. It also could interfere with efforts to receive financial aid for children's college tuition. And, he adds, if an investor is going through a divorce, the additional income could affect the settlement.

Why You Shouldn't Convert to a Roth IRA - WSJ.com