Think a Roth Conversion Is a No-Brainer? Here's When It Can Seriously Backfire.

There's a reason some retirement savers regret using traditional IRAs and 401(k)s to house their money. These accounts eventually force savers to take required minimum distributions (RMDs), which could have huge tax consequences.

If you're looking to avoid RMDs, you may be interested in a Roth conversion. A Roth conversion allows you to move money from a traditional retirement account into a Roth. In doing so, you pay taxes on the sum you move over, but you then get to benefit from tax-free gains, tax-free withdrawals, and no RMDs.

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For many people, Roth conversions make sense. But don't assume that's the case for you.

Think about your tax situation

A Roth conversion commonly makes sense when you can pay a lower tax rate on the money you're moving over. If you're newly retired and are living on just Social Security, you may be in a low tax bracket. In that situation, it could pay to do a Roth conversion.

But if you're still working when you start Roth conversions or are taking large withdrawals from your savings to enjoy the early stages of retirement, then you may be in a pretty high tax bracket to start with. And if so, it may not be an optimal time to do Roth conversions.

Be mindful of Medicare

You should also know that if you're enrolled in Medicare or about to sign up, a Roth conversion could push your income above the thresholds where surcharges on your Part B premiums apply.

Those surcharges are called income-related monthly adjustment amounts, or IRMAAs. And they could add hundreds of dollars per month to the cost of Part B. IRMAAs also apply to Medicare Part D drug plan premiums.

Don't fall into an estate-planning trap

Some people do Roth conversions because they're thinking about estate planning. Inheriting a Roth IRA can be far more beneficial than inhering a traditional IRA in many cases.

With a Roth IRA, there are no taxes on withdrawals, whereas with a traditional IRA, there are. Plus, thanks to the 10-year rule, people who inherit a Roth IRA generally have 10 years to empty the account. For those who don't need the money right away, there's an opportunity right there to grow that inheritance tax-free.

But you don't know what tax situation your heirs are going to be in. If they inherit your retirement savings at a time when they're in a low tax bracket, a traditional IRA may not be such a burden. Paying taxes on a Roth conversion could actually end up costing more than what your heirs would pay, depending on the circumstances.

It's not a bad thing to have some taxable income in retirement

Another thing to realize about a Roth conversion is that it may not make sense if you're planning to give a lot of your money to charity. That's because there may be a way to donate to causes you care about without paying taxes on your RMDs.

Qualified charitable distributions (QCDs) allow you to send funds from a traditional IRA to an eligible charity directly. In doing so, you fulfill your RMD without incurring a tax bill.

If your plan is to share a lot of your wealth with charities, a Roth conversion may not be a wise move. You don't want to pay taxes to convert funds you intend to give away.

Think things through before doing a Roth conversion

A Roth conversion can make sense for a lot of people. But before you rush into one, make sure it's the logical move for your specific situation.

Also, recognize that a Roth conversion doesn't have to be all or nothing. It could make sense to convert a portion of your savings to a Roth IRA but leave the remainder in a traditional retirement account for tax diversification.

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