Today, the idea of converting from a traditional IRA to a Roth is an intriguing one for investors at every income level. But it hasn’t always been that way. Thanks to the elimination of income restrictions in 2010, many opportunities have opened up.

Think about this: With advances in healthcare and people living generally healthier lifestyles, there’s a very good chance you can look forward to 20, 30 or even more years in retirement. A Roth IRA can help you fund those golden years with some significant tax advantages.

How You Can Benefit From a Roth IRA
Unlike traditional IRAs, a Roth IRA is funded with after-tax dollars. So there is no immediate tax benefit to be gained with a Roth. However, the money you contribute to a Roth IRA not only grows tax-free, but you won’t have to pay income tax when you withdraw that money, as long as you are over age 59 ½ and the money has been invested for at least five years. If you need assets before age 59 ½ for a first-time home purchase, you can withdraw up to $10,000 without any tax liability. All of this makes a Roth IRA an incredibly useful and flexible retirement savings vehicle.

What’s more, as long as you or your spouse have earned income (income from a job—not dividends, interest or capital gains) and meet the eligibility requirements, there are no age restrictions for contributing to a Roth IRA. It is important to note that there are income limits for new contributions to Roth IRAs, even though the income restrictions for conversion were removed in 2010.

Building a Case for a Roth Conversion
While tax concerns should never be the primary drivers of your broader investment strategy, it’s helpful to plan for future tax scenarios when you’re considering a Roth conversion. Given the current government expenditures, it’s probably fair to assume that tax rates could move higher in the future for many investors.

If your present tax bracket is less than what you anticipate it could be in retirement, you could convert your traditional IRA to a Roth and pay taxes on that money now. Then your Roth IRA can grow tax-free, and you’ll pay no taxes when you withdraw your money in retirement. Then again, with decades of compound growth, dividends and interest working for you, topped off with no capital gains tax, a Roth IRA could prove to be a wise choice for an investor in many tax brackets.

One more point worth noting: The money you convert to a Roth IRA is not subject to the required minimum distribution rules that apply to traditional IRAs. This means you are not required to take mandatory distributions when you turn 70 ½. So, if you choose, your money can continue to compound tax-free, until you are ready to withdraw it or pass it along to your heirs.

A Few More Considerations
If you know for sure you will be in a substantially lower tax bracket when you retire, a Roth conversion might not make sense. In fact, you could end up pushing yourself into a higher tax bracket in the year you convert, thereby eliminating the potential benefits.

Finally, if you don’t have the money on hand to pay the taxes, a Roth conversion is pointless. Don’t even think about taking money from a traditional IRA to pay the taxes. You’ll be hit with an additional 10-percent early distribution penalty that would negate any possible benefit of the conversion itself.

Believe it or not, this is not an exhaustive exploration on Roth conversions. Rules change frequently and every individual’s situation is unique. We recommend you check with your tax professional or financial adviser to make sure you’ve covered your bases and understand all your options. iBi