• Terry Herr, CFP®, CLU

When a ROTH IRA may be a bad idea.

There are times when Roth IRA contributions or conversions just don’t make sense. Before I jump into all the reasons why you don’t want to ‘Roth’ let’s distinguish between a contribution and conversion.


Albert Einstein is credited with calling compound interest the eighth wonder of the world. If he were alive today, he might say the Roth IRA is the ninth wonder of the world.

Under current rules (2018), Roth IRAs allow you to contribute up to $5,500 annually plus an additional “catch up” contribution for those over the age of 50. While you don’t deduct your contribution for income tax purposes, you will never, ever pay income tax on the growth of the account, nor will your heirs. Note that your ability to contribute to a ROTH IRA begins to “phase out” between $120,000 and $135,000 of AGI as an individual and $189,000 to $199,000 for married filing jointly.*


A Roth IRA conversion is the process of converting existing IRAs, or a portion of an IRA, into Roth IRAs. When you convert, you will pay income tax on the amount converted but any growth going forward will receive the full tax benefit of the ROTH. (no taxation of growth or distributions) Under current tax law anyone, regardless of income can convert to a Roth IRA.

I am a huge fan of Roth IRAs. When the law was first passed, I converted 100% of my then existing IRAs into the Roth and I recommended the majority of my clients do the same.


Even though I am a fan of the Roth IRA, there are time in which contributions and conversions won’t make sense. This list is not exhaustive, but its just as important to know what not to do as it is to know what to do.

When you don’t want to convert:

  1. When you convert you’re going to have a tax bill. Usually this is the biggest deterrent from conversion. It’s going to take some time for your new Roth IRA to recover the taxes you paid.

  2. Tax rates may change. One of the goals of the ROTH is to help lower your future income tax. However, if tax rates are lower when you retire, you may not realize the full potential of the Roth. Additionally, converting when you are in a higher tax bracket may lengthen the ‘break even’ point. Unfortunately, tax regimes change, so even the best estimates may not reflect reality.

  3. Beneficiary tax rates – often our more senior clients will consider a ROTH Conversion with the goal to create a pool of tax free income to their heirs. However, if the beneficiaries will be in a lower tax bracket the conversion may not make sense.

  4. Increase tax in the year of conversion. The amount you convert will increase your adjusted gross income and may have the undesired impact of pushing you into a higher tax bracket or losing benefits tied to “AGI”.

  5. Medical Expense – As you age your health usually doesn’t get better. If you have substantial out of pocket medical expenses in retirement the Roth conversion may be a poor choice. Beginning in 2019 a medical expense deduction is allowed if medical expenses exceed 10% of you AGI. Assuming your medical expenses are high enough, you can use the deduction to offset taxable IRA distributions.

Contribute to a ROTH IRA may not make sense if:

  1. If you have an employer sponsored plan, you’ll want to maximize the benefits offered by your employer before you consider any other retirement savings. At a minimum you should be contributing enough that you get the full employer match. Often employers offer a ROTH 401(k) option, as well, which will allow you to have all the benefits of the ROTH IRA through an employer sponsored payroll deduction.

  2. If you need a tax deduction or can’t afford your taxes the Roth IRA may not be a good choice. If you are in a 20% tax bracket a $5,500 contribution may lower your taxes as much as $1,100*

  3. You are certain you’ll be in a higher tax bracket today than you will be in retirement. If your current tax rate is 35% and your confident you’ll be in a 15% bracket in retirement, you may not realize the tax benefits of the Roth.

  4. Your investment time horizon is short-term. Unless you have some time between now and the time you’ll withdraw money from your account itmay not make sense to pay tax on the money your contributing to a ROTH. The current year deduction may be more valuable.

  5. Finally, if you’re charitably minded and plan for some or all of your retirement account to go to charity, you don’t want to use a ROTH IRA for the donation. Chances are your charity already enjoys tax-free status. When done properly, charitable donations of retirement assets can minimize the amount of income taxes imposed on both your individual heirs and your estate.

IRAs are Complicated

For most IRAs seem pretty straight forward, however, the IRA, Roth IRA and retirement plan rules are incredibly complex. As we approach retirement and begin distributions, they become even more complex. The decision to ROTH or not to Roth whether it be through an individually arranged account or through your employer requires careful consideration.

While we’ve given you some reasons to not contribute or convert to the ROTH IRA, we’re not suggesting you don’t contribute to a retirement plan. Any retirement plan contribution, is better than no retirement plan contribution. However, having knowledge of the nuances can make a huge difference over the course of your life.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Herr Capital Management does not provide tax advice and this content should not be regarded as individual tax advice.


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