One reason Roth IRAs are so popular is the tax benefits: Money in the account grows tax-free and qualified withdrawals in retirement are tax-free, as well. Still, there are times when it might make financial sense to convert your Roth IRA to a traditional IRA. Here are five compelling reasons.

Key Takeaways

  • Roth IRAs offer tax-free withdrawals during retirement, but sometimes it makes financial sense to get a traditional IRA's upfront tax break.
  • If you convert to a Roth IRA and end up in a higher tax bracket, you can reverse the conversion.
  • If you make too much money, you can't contribute to a Roth. Traditional IRAs don't have income restrictions for contributions.

Traditional IRAs Have Upfront Tax Breaks

The simplest, if not the bleakest, reason to convert your Roth IRA to a traditional IRA is that you're cash poor, at least right now. That means you might not be able to comfortably pay the income tax due on the money you contribute to a Roth IRA.

Contributing to a traditional IRA is less of a financial stretch because that money is taken from gross pay, not takehome pay. In other words, you get an upfront tax break on your contributions. When you withdraw the money during retirement, you'll owe income taxes on your contributions and investment returns.

"In a situation where someone is tight for cash, a traditional IRA contribution will provide more deductions, and therefore, more cash in hand after tax filing," notes David S. Hunter, CFP®, president of Horizons Wealth Management, Inc., in Asheville, N.C.

Your Roth Account Underperformed

If your Roth IRA account has suddenly lost value due to market forces, Uncle Sam won't cut you a break. You'll still be taxed on the money you put into the account that year.

You might save on your tax bill by converting your Roth IRA to a traditional IRA. With the switch, you at least defer the reckoning until after you retire. Even then, you are taxed only on what you take out—not on the entire balance.

You Made Too Much to Contribute to a Roth

You must meet specific modified adjusted gross income (MAGI) levels to contribute to a Roth IRA. In 2020, your income must be less than $124,000 (as a single filer) to make the full contribution, which is:

  • $6,000 if you're less than age 50
  • $7,000 if you're age 50 or older

The limit for married couples filing jointly is less than $196,000. There are reduced contribution levels if your MAGI is a few thousand dollars above those cutoff levels.

You can convert a Roth to a traditional IRA anytime. You report it on the same year's tax return.

If your MAGI exceeds the maximum level—or is hovering near it—you might want to convert your Roth IRA to a traditional IRA. That way you can still contribute to an IRA: There are no income limits for contributing to a traditional IRA.

Still, if you make too much money you might not be able to take the full upfront tax deduction—so do some number crunching before you make any decisions.

You Expect Your Income to Drop

Say you crunch the numbers on your projected annual income after you retire and realize you're likely to be in a significantly lower tax bracket. That's not necessarily a disaster if you have determined that your living costs will be lower too.

However, it means you won't benefit as much from the tax-free distributions that are the key feature of a Roth IRA. If you convert to a traditional IRA now, you'll get the immediate tax benefit of pre-tax contributions. That can give you more money to invest elsewhere, or provide extra cash that you need now.

"If you are expecting to be in a lower tax bracket in retirement, which is common, then it makes more sense to utilize a traditional IRA," says Mark Hebner, founder and president of Index Fund Advisors in Irvine, Calif.

"You forgo paying taxes on contributions at your current higher tax rate and then pay taxes in retirement at a lower tax rate on distributions."

Just keep in mind that required minimum distributions (RMDs) begin at age 70 ½ for a traditional IRA. Roth IRAs have no RMDs during the original account owner's lifetime.

A Roth Conversion Bumped You Up a Tax Bracket

If you turn a traditional IRA into a Roth IRA, you'll pay income taxes on the amount you convert—and it could be substantial.

If you convert a traditional IRA worth, say, $100,000 into a Roth IRA, your taxable income increases by $94,000. That's the balance of the account minus the $6,000 you're allowed as an annual contribution to the Roth. (You can contribute another $1,000 if you're aged 50 or over.)

That could bump you into a higher bracket. Within the world of retirement accounts, this scenario is a true paradox, but it might make sense to reverse the conversion (called a recharacterization). You have until Oct. 15 of the year after you make a Roth IRA conversion to reverse back to a traditional IRA.

The Bottom Line

There is one final benefit to the conversion: You're likely to get a refund of the income taxes you’ve already paid for the Roth account.

Whatever your reason for converting an account, keep in mind the calendar deadlines that the IRS imposes. Conversions must be completed by the final date allowed to file or amend your previous year’s taxes. The standard date is October 15th.

Roth IRAs get you an investment account that is totally tax-free at retirement. But your personal circumstances may dictate that it makes sense to convert your Roth to a traditional IRA.