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By Christine Benz | 10-17-2013 12:30 PM

When Roth Conversions Do (and Don't) Make Sense

Certain situations can make conversions more or less practical for older investors, says Vanguard senior investment analyst Maria Bruno.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I recently visited Vanguard, where I sat down with Maria Bruno, a senior investment analyst in the firm's investment strategy group. We discussed converting traditional IRA assets to Roth.

Benz: Maria, thank you so much for being here.

Maria Bruno: Thank you, Christine.

Benz: Let's start by looking at Roth conversions. One thing I often hear from people who are already retired is, I am too old to do a conversion; it won't really make sense.

First, let's get into the thinking behind why age might be linked to whether or not a Roth conversion makes sense.

Bruno: I do think a lot of retirees struggle with that in terms of … well, I am retired. I'm not contributing anymore. Can I convert? Should I convert? They're thinking of their time horizon and whether it makes sense. So, there are a lot of variables that factor into that conversation. But many times a conversion could be very viable.

Benz: Let's talk about some of the categories where a Roth conversion probably won't make sense. You noted that if you are using your traditional IRAs for spending money, then that will tend not to be a great fit in terms of doing a Roth conversion.

Bruno: Yes. The thought there is, if you're spending those IRA dollars anyway for your expenses or maybe there are RMDs and you're spending those, then a conversion may not make sense because you're accelerating that tax liability.

Benz: So, you're paying more than you actually would need to versus if you were just taking income from that IRA on a year-to-year basis?

Bruno: You're accelerating that tax liability, which potentially could put you into a higher tax bracket. Those are some of the nuances that you'd want to think about.

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