The Roth IRA has gained popularity—and for good reason. The promise of tax-free withdrawals may have you asking: Why not convert my retirement account to a Roth IRA today?

If you have a Tradition IRA, 401(k), 403(b) or 457 plan account, you may want to consider converting if…

• You have 10 years or more until retirement.
• You have enough money outside your IRA to pay income taxes on the conversion.
• You expect to be in the same or higher income tax bracket when you retire.
• You have several retirement accounts in several different places. (Consolidating these accounts into a single Roth IRA enables you better track performance and ensure the accounts will be handled according to your wishes.)

The rules of a Roth conversion, including those determining eligibility, are very complex. Before making a conversion, we strongly suggest you sit down with your Thrivent Financial representative and your tax advisor to discuss your situation and the pros and cons of a conversion.

The tax consequences
Traditional IRA assets are typically pre-tax, so when these funds are converted to a Roth IRA, the IRS considers any non-taxed portion to be a taxable distribution. Therefore, the biggest consideration of a conversion is often the effect of paying income tax on the converted amount up front, in one tax year.

Ideally you should have enough money outside of your retirement accounts to pay the tax. If you need to withdraw money from the IRA that’s being converted, you’ll lose the assets’ tax-deferred advantage and you’ll have to pay income tax (and possibly a 10 percent penalty) on the withdrawal.

This factor alone shouldn’t dissuade you from converting, but it’s an important factor to discuss with your Thrivent Financial representative and tax advisor when reviewing your options.

Your future tax situation
Predicting the future is hard, but if you expect your income tax rate to be higher or lower in retirement, it may help you decide if conversion makes sense.

By paying taxes now on your conversion, you’re effectively locking in your current income tax rate on the assets in your traditional IRA. That may or may not be to your advantage, depending on your income tax rate when funds are withdrawn.

Your time frame
Because all gains in a Roth IRA are income tax-free when certain conditions are met, the longer your time frame, the more likely you are to benefit from a conversion. That’s why some financial professionals follow a rule of thumb that says conversion makes sense for people with 10 years or more until retirement.

Keep in mind that withdrawals of Roth IRA earnings are income tax-free only if you hold them for at least five tax years after your initial IRA contribution (or conversion) and a qualifying event occurs.

As you can see, a Roth IRA conversion is an important decision—one that you shouldn’t make alone. You can count on your Thrivent Financial representative to help you choose the course of action that’s right for you.