Let’s talk about IRAs. There are two general kinds of IRAs: Traditional IRAs and Roth IRAs. First, what’s the difference? In a nutshell, you can deduct traditional IRA contributions from your federal and state income tax returns for the year you make the contribution. When you retire and start making withdrawals the money is taxed at ordinary income tax rates. Unlike traditional IRAs, Roth IRAs do not provide a tax break when you make contributions. However, earnings and withdrawals from Roth IRAs are typically tax-free.
So with that in mind, why would someone want to switch from a traditional to a Roth? Roth IRAs offer another advantage. They are subject to the lifetime minimum distribution rules. Traditional IRAs are. These rules require IRA owners to start taking distributions as soon as they reach age 70.
The new tax laws have also made things a little different for Roth owners. On the plus side, the income tax rates have gone down. That means you are likely to pay a smaller tax cost when you convert from a Traditional to a Roth. On the other hand, the tax did eliminate the re-characterization rule that used to be available for Roth IRA conversions.
When all is said and done, converting from a Traditional IRA to a Roth IRA is still a very viable option under the right circumstances. Losing the re-characterization option is a negative. But the overall positive factors of a Roth, combined with the new lower income tax rates, makes conversion a good move for many taxpayers.