Roth IRAs: To convert or not to convert? / Advisers suggest that most folks should have traditional and Roth IRAs. Having both those kinds of accounts will give you the flexibility to withdraw money in the most tax-efficient way when you’re in retirement.

Robert Powell for MarketWatch writes:  But does there come an age at which converting your traditional IRA into a Roth IRA might not make sense? Consider the case of couple I recently met. The wife, 64, and husband, 68, are just entering retirement. He converted some of his traditional IRA into a Roth IRA last year and is now wondering, given their ages, how much longer it makes sense to continue that process. “Is there some conventional wisdom on this?” he asked.

Well, yes, there’s conventional wisdom. But you might as well disregard it, say experts.

To answer the question of whether it makes sense to do a Roth IRA conversion you must ask yourself three questions, do some number crunching, and do a little crystal ball gazing.

“There are an absurd number of Roth conversion calculators out there to help people make these decisions, many of which have a lot of merit,” said Jeffrey Levine, CPA, an IRA technical consultant with Ed Slott and Co. and a MarketWatch Retirementor.

But when Levine consults with clients about Roth IRA conversions, he typically focuses on three key questions:

What do you think your future tax rate will be? “The answer should generally be higher than the current tax rate to make sense,” he said.

Where will you get the money to pay for the conversion? The answer should generally be from non-retirement account funds, Levine said.

When will you need the money?

Note, he said, that the last question does not discuss age. “Age is really irrelevant,” said Levine. “If a 95 year-old believes his future tax rate, or that of his beneficiaries, will be higher, has non-retirement account money to pay for the tax on a conversion and doesn’t need his IRA money to live off of, a Roth IRA conversion could well make sense. Conversely, a much younger retiree who needs to use their IRA money to live off of probably should not convert.”

Rande Spiegelman, CPA, a vice president of financial planning for the Schwab Center for Financial Research, agrees with Levine. “Even though you have to pay current income tax on the amount you convert to a Roth IRA, it still might make sense if you plan on using your IRA money for living expenses during your lifetime, you will be in the same or a higher tax bracket when you withdraw, and you can pay the tax from sources other than your IRA, such as regular taxable brokerage or bank accounts,” Spiegelman said.

The real power of Roth IRAs

The real power in the Roth IRA is in the tax-free compounding, said Levine. “The specifics vary from case to case, but as a general rule, if people plan to use the money within the next five years, a Roth conversion doesn’t make sense,” he said. “If they can wait five to 10 years it probably still doesn’t make sense.”

But if someone can wait 10 years or longer, the Roth conversion begins to make sense, with the greatest benefits seen by those who can wait 15-plus years before using any of their converted funds, said Levine.

It’s worth noting that at the ages of the couple mentioned above, RMDs are right around the corner, Levine said. “At 70½, money is going to have to come out of IRA, whether someone likes it or not,” he said. “Plus, there’s a lot we don’t know about this couple. They are 64 and 68. They could both be taking Social Security, one of them could be, or neither of them. If they’re delaying taking Social Security, converting now might help keep less of their future Social Security payments from being subject to taxation.”

There’s no break-even period

Other experts share Levine’s advice around disregarding age as a factor when deciding whether to convert money from a traditional IRA to a Roth IRA.

“Conventional wisdom with regard to Roth conversions has included age as a factor,” said John Kilroy, CPA, who maintains a sole proprietorship tax and accounting practice in the Philadelphia area. “Typically it is suggested that those in their 60s and above may not wish to convert as there may not be sufficient time to ‘recover’ any taxes paid on the conversion. It may be prudent, however, to consider whether a break-even thought process is relevant to the issue.”

Think of it this way. “The balance you see on your traditional IRA statement is not all yours,” Kilroy said. “If you were required to prepare a personal financial statement you would have to include an assumption as to the amount of tax due on the IRA balance as a liability, thereby reducing your net worth.”

In that sense, he said, there is no break-even period to be concerned about and no reason to consider the age of the person who is contemplating a Roth conversion.

Other factors, he said, may be worthy of greater consideration. For instance, is the amount of the conversion contemplated in a specific year chosen after a projection of current year income, deductions, and tax rate is completed, or is the conversion amount more of a random selection? What is the relative balance of the value of traditional IRAs (and other pretax retirement accounts) and Roth IRAs (and other Roth accounts)? “If close to 50-50 it may be prudent for the taxpayer to evaluate whether any further conversions are necessary,” said Kilroy.

Finally, Kilroy said if the taxpayer has an expectation that any Roth account established will likely pass as part of a legacy to others then the value of further conversions may increase.

Spiegelman is of the same opinion. He says converting to a Roth IRA, still might make sense if you don’t need to use the money but want to leave an income-tax-free Roth IRA to your heirs for gift and estate-planning purposes. Read Roth IRA Conversion: Look Before You Leap.