What Is a Roth IRA Conversion?

Moving money from a traditional IRA to a Roth IRA means you'll owe taxes on that money right now. All the money you move gets added to this year's taxable income.

Exception: If you made contributions to a traditional IRA but didn't get a tax deduction for them, you only pay taxes on the growth, not the original contributions you put in.

Important Warning: You must consider ALL your IRA accounts together — traditional IRAs and SEP-IRAs. If you made tax-deductible contributions to those accounts and they now have large balances, a Roth conversion probably isn't a good idea unless you're trying to create more income in a low-income year.

The Big Question

Should you pay taxes now to move money into a Roth and potentially avoid all taxes on future growth?

This might make sense if:

• You have many years before you'll need this money

• Your income is unusually low this year

• You want to leave tax-free money to your heirs

Things to Think About

• Can you pay the extra taxes? You need other money (not the IRA money) to pay the tax bill. Figure out exactly how much extra tax you'll owe.

• The 5-year rule: For the growth to be tax-free, the money must stay in the Roth for five years. Will you need this money within five years?

• Future benefits: Will converting now lower your future income enough to reduce taxes on Social Security benefits and lower Medicare premiums?

• Moving out of California? If you're planning to move to a state with lower taxes, wait until you're officially no longer a California resident to do the conversion.

Backdoor Roth Conversions

Here's a popular strategy for high earners: If you can't get a tax deduction for contributing to a traditional IRA, contribute anyway. Then immediately convert it to a Roth IRA. This gets around the income limits for contributing directly to a Roth and gives you tax-free growth. But remember the warning above about having other IRA accounts.

Get Professional Help

There are many other factors and exceptions to consider. Don't make any major financial moves with significant money until you've talked through the details with an experienced CPA tax accountant.