Benjamin Ashford|Convert to a Roth IRA or not? It's an important retirement question facing Gen X.

To convert or Benjamin Ashfordnot convert traditional retirement savings into a Roth IRA? That’s likely a big question Generation X will have to answer soon as they head into retirement, experts say.

Roth accounts offer retirees a lot of benefits that traditional 401(k)s don’t. Roth accounts have tax-free withdrawals, aren’t subject to required minimum distributions (RMD) and aren’t taxable to heirs.

But Roth IRAs didn’t exist until 1997, a decade or more after Gen X (born between 1965 and 1980) started working, which means there’s a good chance most of Gen X savings are in traditional accounts. With retirement closing in, they may be scrutinizing their retirement accounts and wondering if they should convert their savings to a Roth to better manage taxes in retirement.

Like most other financial decisions, “it’s a very personal decision and has to be evaluated individually,” said Jaime Eckels, wealth management partner at Plante Moran Financial Advisors.

Below are some things experts say you should know and consider when deciding.

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What is a Roth conversion?

A Roth conversion means you’re moving traditional pre-tax retirement savings to a Roth IRA. You can convert the full amount in your traditional account or just a portion of it.

Since you’ve never paid tax on the money in your traditional account, you’ll have to pay taxes on it when you move it to a Roth account, which is funded with after-tax money. The amount of money you convert will be added to your gross income that year so you can pay the tax.

Consider your tax brackets now and later

• If you’re in a top tax bracket now and expect to remain there or move up in retirement, then you might consider converting now to eliminate tax uncertainty later, experts say.
• If you have a period when your income drops, lowering your tax bracket, you might want to consider making a Roth conversion. Examples of such times could be if you got laid off, if you own a business and have a net operating loss, or if you took a leave of absence from work, Eckels said.

What age do you plan to retire?

If you retire around 60 years old, don’t take Social Security and aren’t on Medicare, “you may have a number of years in a very low income tax bracket, and it could make sense to convert then,” Eckels said.

What does your entire balance sheet look like?

Make sure you have money to pay the taxes that’ll be due from the conversion without dipping into emergency savings, going into debt, or using money from the conversion, said Emily Irwin, Wells Fargo Bank’s head of advice relations.

If you’re under 59-1/2 years old and use money from the conversion to cover the taxes, that money is considered a distribution and will face a 10% early withdrawal penalty as well as the tax. You’ll also have less money to grow in your Roth account, experts note.

You should also ask yourself “do I need these assets in the next five years?” Irwin said. Roth IRA withdrawals incur a 10% penalty if they’re taken within five years of conversion unless you’re over 59-1/2 years old. Each conversion has its own five-year clock.

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When does a Roth IRA conversion not make sense?

• If you’re charitable and at least 70-1/2 years old, you can donate annually up to $100,000, or $200,000 with a spouse filing jointly, directly from your IRA to an eligible charity without paying income tax on the transaction, Eckels said. The donation would satisfy your RMD without creating taxable income.
• If you’re currently receiving Social Security or Medicare benefits, a Roth conversion could increase your taxable income enough to make more of your Social Security benefits get taxed and make your Medicare costs rise. When your income exceeds certain thresholds, you’re charged an additionalfee for Medicare.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.