I receive a great many inquiries about retirement accounts. One area of particular interest is Roth conversions.

Fortunately, IRA expert Ed Slott and his staff spend a great deal of time and effort addressing the most important questions you should be asking before you decide that a conversion makes sense for you. The following questions are very important. If you haven’t considered all of them, you probably should not be completing a conversion.

Question 1: When will you need the funds you are considering converting? If you are not looking at a 10- to 15-year time horizon, you probably should not be considering a conversion.

Question 2: Do you believe that future tax rates when you will be likely to withdraw funds from your account will be higher than current tax rates? If you believe that it is likely that future tax rates will be much higher than current tax rates, then you have more of an incentive to do a conversion.

Question 3: Where will the money come from if you do a conversion now? Do you have the funds available to do a conversion? Before you convert, it is essential that you determine what the income tax liability will be if you do a conversion. Naturally, you need to know what your marginal tax bracket will be, based on all of the other income you will be reporting in the year of conversion. It’s most cost- effective if your funds are available from non-IRA funds.

The amount of your conversion will be added to other income you have to report in the year of conversion. The total amount of income you report can affect other income tax liabilities. For example, if your adjusted gross income exceeds specified IRS limits, you could be subject to surcharges associated with Part B Medicare premiums. This computation will be made by the IRS two years from the year of your conversion. So, if you plan on converting in 2025, then Medicare would be reviewing your AGI in 2027 to determine if a surcharge would be associated with Part B coverage of Medicare.

The Tax Cuts and Jobs Act, which went into effect in 2018, stipulates that any Roth conversion is permanent and cannot be recharacterized.

Who can do a conversion?

Traditional IRA owners can do Roth conversions. That group includes individuals with SEP IRAs and SIMPLE IRAs (after the first two years). Plan participants in 401(k)s ,403(b)s and governmental 457 plans can do Roth conversions if the plan allows in-service distributions so that the funds can be converted. Some plans only allow conversions after an employee stops working.

The funds must leave the plan by December 31 of the year in order to be converted that year.

A spouse who inherits an IRA can roll the account to his/her own IRA and then convert to a Roth IRA. A spouse who inherits a 401(k) can do the same thing.

The 10% early distribution penalty is not assessed at the time of a Roth conversion. However, it can be assessed if any of the converted amounts are distributed to the Roth owner within five years of the conversion, when the owner is under the age of 59 1/2 at the time of the distribution.

Software might help you decide

Determining whether you should convert, and/or whether you should consider partial conversions is complex. If you want support in making this decision, Ed Slott recommends the Retirement Plan Analyzer available from Brentmark Software (cost $595). Slott believes that their software is easy to use for IRA planning calculations. For more information, visit Brentmark.com.

Bottom line: Because Roth conversions are permanent, you must plan conversions carefully, not only determining whether you should convert but also whether you should be doing partial conversions as opposed to converting all of your account in one year. There is no question that for many situations, conversions to Roth is cost effective, but you should not do a conversion without careful consideration of all of the tax consequences.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.