When evaluating whether to convert your traditional IRA to a Roth IRA, you need to project your future tax bracket, as well as your future investment returns. Since these types of projections are only estimates, keep in mind that your actual results may turn out quite differently, especially if retirement is far off.

Here are some details about making these projections.

Projecting that your tax bracket will stay the same or increase

If you expect to have about the same amount of money or more coming in during retirement as you do now, you may be projecting that your income tax bracket will stay about the same or increase.

This may be your situation if you build up adequate savings or other sources of retirement income. Or perhaps you’re just starting out or for any other reason you expect to have more income in the future.

You may, on the other hand, think you’ll have less income in the future. At the same time, however, you may think that tax rates in general will rise by the time you retire, which would still leave you in the same or higher tax bracket.

In these cases, if you’re many years from retirement you’ll generally come out ahead by converting your traditional IRA to a Roth IRA. Importantly, this assumes you’ll pay the conversion taxes from outside your IRA. The key reason the tax-free Roth IRA wins out: Because eliminating taxes at equal or higher rates on all your future IRA earnings outweighs the cost of paying taxes at your current rate now.

If you’re closing in on retirement, however, whether you’ll end up with more in a Roth IRA depends in part on the number of years you’ll spread your withdrawals over. If you’ll be taking your money soon, you may be better off leaving your money in your traditional IRA.

Projecting that your tax bracket will significantly decrease

If you’re earning much more now than you expect to have coming in during retirement – especially if retirement is approaching – you may be projecting that your future tax bracket will be much lower. Likewise, if you’re converting a large traditional IRA that may push you into a much higher tax bracket for only that one year, your tax bracket in retirement may significantly decrease.

In these and other situations where you expect your tax bracket to drop significantly in retirement, you should generally leave your money in your traditional IRA. If instead you convert to a Roth IRA, you would pay conversion taxes at a higher rate than you would have paid on your traditional IRA withdrawals.

An exception to this general guideline: If you’re several decades from retirement and you plan to withdraw your IRA money over many years, or you plan to leave your IRA to your heirs. With so many years before you or your heirs tap your Roth IRA, there may be enough time to overcome the cost of paying the conversion taxes at a higher rate.

Moreover, because it’s impossible to know so far into the future whether your tax bracket will actually decrease, you may decide to convert to take certain advantage of the Roth IRA’s tax-free benefits.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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