Should You Convert To A Roth IRA Before Retiring? One Couple Faces A $38,000 Question

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A couple approaching retirement is weighing a decision that could significantly affect both their taxes today and their retirement income in the future.

The husband wants to convert a portion of their traditional self-directed IRA into a Roth self-directed IRA, believing the upfront tax cost could pay off over time through tax-free qualified withdrawals. His wife, however, worries that triggering an estimated $38,000 tax bill just a couple of years before retirement could put unnecessary strain on their finances.

The debate highlights a question many retirees eventually face: Is paying taxes now worth the potential benefits later?

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Why Pay Taxes On Purpose?

A Roth conversion moves money from a traditional IRA into a Roth IRA. The amount converted is generally treated as taxable income in the year of the conversion.

In exchange, future qualified withdrawals from the Roth IRA—including investment earnings—can generally be received tax-free if IRS requirements are met.

For investors who expect assets such as real estate or other alternative investments to appreciate over time, converting before much of that appreciation occurs may allow more future growth to take place inside the Roth IRA.

The tradeoff is straightforward: paying taxes today in exchange for the potential for tax-free qualified withdrawals later.

Why Waiting Until Retirement Changes The Math

Timing can play an important role in deciding whether a Roth conversion makes sense.

Many financial professionals suggest paying the tax bill with money held outside the IRA whenever possible. Using retirement assets to cover the taxes reduces the amount that can continue growing in the Roth account.

The couple also needs to consider how the conversion affects their current tax bracket and whether adding the converted amount to this year's taxable income could increase their overall tax liability.

With retirement only a few years away, having enough non-retirement assets available to cover an estimated $38,000 tax bill is an important part of the decision.

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Does It Have To Be All At Once?

Not necessarily.