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For a lot of people, converting a traditional IRA to a Roth IRA makes sense. But there are times when a Roth conversion may not be the best option.” Renee Chamberlain


By Renee Chamberlain


Converting a regular IRA to a Roth is, most of the time, a fantastic option for federal employees and retirees. A Roth conversion results in retirement funds going into an account that gives you tax-free growth and withdrawals. One advantage of a Roth is that it is currently the only tax-advantaged retirement account that doesn’t have required minimum distributions (RMDs).

However, there are a few disadvantages of Roth IRAs and certain circumstances when this conversion won’t work well for Feds. An obvious disadvantage of a Roth conversion is that all federal and state income taxes are due in full in the conversion year. Also, an IRA owner may lose some tax-deferred growth in their traditional account without gaining more valuable benefits by converting to a Roth.

Suppose you’ve been encouraged to do a Roth conversion. In that case, it’s a good idea to consult your retirement income advisor before deciding, particularly if you find yourself in any of these situations:

Your taxes are likely to decrease.

Typically, converting to a Roth is not justified if the IRA owner’s marginal tax bracket is predicted to be lower in the future. While advisors often make the case that taxes are more likely to increase than decrease, it is still best to convert when you are in a lower tax bracket. That usually happens when your income dips. You could find yourself with fewer tax obligations after leaving service, meaning a Roth conversion would have negligible benefits. For example, say you plan to move from where you’ve made your IRA contributions to a state with lower or no income taxes. For instance, say you are a federal employee who has changed positions or has retired from federal service. If that is your situation, you might wait to convert until you’ve established residency in that other state. That way, you’ll avoid state taxes.

You need your IRA money right now.

A Roth conversion carries the biggest bang for the buck when the account is allowed to grow untouched for several years. If you need that money sooner than five years after conversion, switching to a Roth doesn’t add up because your account won’t have enough time to grow.

You lack the cash to pay your tax bill.

If you’re thinking about Roth conversion, be sure you have enough liquid assets to pay the taxes so you won’t have to tap into your retirement accounts. As mentioned, the income taxes on a Roth conversion are due during the same year of that conversion. Paying that tax bill with IRA assets will decrease the amount of the IRA that can grow tax-free.

A Roth conversion could cause you to lose tax credits.

When you convert to a Roth, your income for that year increases. Depending on your situation, that bump in revenue could cause you to exceed income thresholds for certain tax credits and deductions. You would be wise to talk to a tax specialist about the long-term tax implications a conversion might have.

You may not want to convert if you own a traditional IRA, are over 70.5, and make Qualified Charitable Distributions.

A traditional IRA owner, 70.5 or older, is allowed under IRS to donate up to $100,000 of assets per year from that IRA to one or more charities. You can then have your donations apply towards your annual Required Minimum Distribution. While you will not receive a charitable deduction for tax purposes, you won’t include the TSP withdrawal as part of your income. For some people, this can be a significantly efficient tax reduction strategy.

On the other hand, Roth IRA owners do not benefit from Qualified Charitable Distributions. For this reason, a traditional IRA owner may choose not to convert all their traditional IRAs to Roth IRAs. Instead, the owner may want to convert only some of their traditional IRAs but not all of them.

You have high out-of-pocket medical expenses.

Current law allows you to deduct unreimbursed medical expenses if the total costs exceed a threshold. If a person has above-average medical expenses, the deductible expenses may reduce or, in some cases, eliminate taxable income. However, if all the funds are in a Roth IRA and withdrawn, those withdrawals are not included in income. If used to pay medical expenses, there is no deduction.

If the withdrawn money comes from a traditional IRA (taxable income) and is used to pay qualified medical expenses, those costs can be deductible if they exceed the threshold. You and your tax expert will need to run the numbers to see if Roth’s benefits will offset your lost deductions.


Bottom line: In many instances, converting to a Roth from a traditional IRA is a wise course of action for federal employees. It would help to discover more about potential pitfalls and tax consequences. Before converting your traditional IRA to a Roth, you should consult a qualified financial professional with experience in conversions and a thorough knowledge of potential tax issues.  If you’d like a “second set of eyes” to review your situation, or you need help with any other federal benefits, please reach out to me.  I specialize in helping government employees get the most from their amazing benefits, and I love to help.