When it comes to retirement savings vehicles, you could say that Roth individual retirement accounts (IRAs) are the “cool kids.” These popular savings options are funded with after-tax dollars, so they don’t give you a deduction at income tax filing time. However, they do offer some attractive benefits, such as tax-free earnings growth when earnings are withdrawn after age 59½ from an account that's been open for five years or more. In addition, contributions can be withdrawn at any time without penalty, giving you quick cash when you need it.

If you already have a traditional IRA, it might make sense to convert it to a Roth, allowing you to take advantage of these benefits. However, a conversion may not be suitable for all investors. Are you a good candidate for a Roth conversion? Here are five questions to ask.

How much do I earn?

You can open and contribute to a Roth IRA at any age, provided you have "earned income" in the year you want to make a contribution. However, Roth IRAs are subject to income thresholds and phase-outs. If you earn $122,000 or more as a single or $193,000 as a married couple filing jointly, you may not be able to contribute in full or at all to a Roth IRA. In fact, if you make an ineligible contribution, you’ll owe a 6% penalty - every year until you fix the mistake. But you can still convert your IRA, even if you don’t qualify for a direct contribution, by using a “backdoor conversion." With a conversion, you simply roll over all or part of the funds from your traditional IRA to a Roth. However, you will have to pay taxes on the money you convert.

Will my tax rate be the same or more in retirement?

Because Roth contributions are made with after-tax dollars, you don’t get the benefit of a tax deduction, but your earnings grow tax free. If you expect that your tax rate will be much lower in retirement, you may wish to stick with a traditional IRA. However, if you expect your tax rate to remain the same or to increase, it may be worth foregoing the deduction now for the promise of tax-free earnings over time. The Tax Cuts and Jobs Act (TCJA) of 2017 may have lowered your tax bracket, so you may owe less now than if you had converted in previous years.

Will I want flexibility in my retirement income?

Another reason to like Roth IRAs: There are no required minimum distributions (RMDs) at age 70½ unless you've inherited the account. If you are the owner of the Roth IRA, you can forego withdrawals if you don’t need the money. Let’s say you have enough assets from other investments or income streams to sustain you past age 70½. You can leave your Roth assets in the account, allowing them to continue to grow tax free. Need more income? You can withdraw the money tax free at any time, for any reason.

Can I afford the tax liability?

If you convert all or part of your traditional IRA to a Roth, you will need to pay taxes on the untaxed contributions to the new account. So, consult your tax advisor to determine how much the conversion would add to your overall tax liability. Remember, if you convert early in the calendar year, you’ll have until April of the following year - your typical tax filing deadline - to pay the taxes.

Will I have time to make up the cost of conversion?

Think about how long you will likely hold the assets of your Roth conversion before withdrawing them. Is it likely that you’ll do so long enough to make up the cost of conversion, including the income tax you will incur? If so, it may be a good idea to convert. There are several calculators available that can help you determine your potential return.

A Roth IRA conversion can give you some important benefits, but it’s important to discuss the implications and your specific financial situation with a financial or tax professional. For more information about Janus Henderson Roth IRAs, visit https://janushenderson.com/en-us/investor/all-account-types/roth-ira-account/

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