Is converting a traditional IRA to a Roth IRA a good idea for you? At first glance, a Roth IRA may not seem worthwhile. You cannot deduct Roth IRA contributions in the current year, while you can make tax-deductible contributions to a traditional IRA if you meet the income requirements.

The advantages of a Roth IRA come later. When you take withdrawals from a Roth IRA, you don’t have to pay taxes, as long as the account has been open for more than five years and you’re age 59 1/2 or older. In contrast, withdrawals from a traditional IRA are taxable.

So which account is better for you? A deciding factor is your tax rate. If you expect to be in the same or a higher tax bracket at the time you begin taking withdrawals, a Roth IRA is generally advantageous.

December 31 is the deadline to convert a traditional IRA into a Roth IRA for this year. You have to pay income tax on the amount placed in the Roth account but you escape taxes on future earnings that accumulate.

Bonus:┬áIf the value of your IRA is currently down due to the stock market, the tax cost of converting your traditional IRA to a Roth IRA will be lower too. What if you converted to a Roth IRA earlier this year when your IRA was worth much more? You can change your mind by “recharacterizing” the conversion by a certain deadline. Then, you’ll have a regular IRA again. (You can “reconvert” to a Roth IRA in the future, provided you follow certain rules.)

Remember that converting an IRA results in an increase in your adjusted gross income, which can in turn make you ineligible for certain tax breaks. A boost in your income can also make more of your Social Security benefits taxable.

Contact our office before December 31st for guidance on year-end tax planning moves such as converting a traditional IRA to a Roth account.