So you've stashed your money in a 401(k) or a traditional Individual Retirement Account to reap the tax benefits that come with these tax-deferred accounts, but now you wonder if that was the right move. You'll have to pay taxes on your distributions in retirement, and this can cost more than you realize. But you can change all of that with a Roth IRA conversion. Here are three reasons to consider it.

1. It could reduce how much you pay in taxes.

You may know that tax-deferred retirement accounts, like most 401(k)s and traditional IRAs, make more sense if you believe you're in a higher tax bracket today than you will be in retirement. By delaying taxes until retirement, you'll lose a smaller percentage of your income to the government.

Roth IRA envelope with money

Image source: Getty Images.

But if you think you'll be in the same or a higher tax bracket in retirement, a Roth IRA is your best bet for reducing taxes. This may be the case for you if you're just starting out in your career or if you're only working part time. You pay taxes on your initial contributions in the tax year you make them for. Then, after that, the money grows tax-free. You won't pay any taxes on withdrawals in retirement, as long as the account has been open for at least five years and you're 59 1/2 or older.

A Roth IRA conversion can help you take advantage of these benefits and minimize your taxes in retirement if most of your savings is currently in a 401(k) or traditional IRA. The catch is, when you do this, you must pay taxes on the converted account in the year you make the conversion, which could raise your tax bill significantly.

But you don't have to convert all your tax-deferred funds to a Roth IRA all at once. You can do a little year by year to minimize the impact on your taxes. Consult with a tax professional or a financial advisor if you're not sure how much to convert at a time.

2. You won't have to worry about required minimum distributions.

Once you turn 70 1/2, the government forces you to start taking required minimum distributions (RMDs) from all of your retirement accounts except Roth IRAs, unless you're still working and you own less than 5% of the company you work for. This is how Uncle Sam gets his cut of your retirement savings. You can calculate how much your RMDs will be by dividing the value of each of your retirement accounts by the distribution period listed next to your age in this worksheet from the Internal Revenue Service.

RMDs could force you to withdraw more money from your tax-deferred retirement accounts than you wanted to, which could raise your tax bill for the year. But if you move your money into a Roth IRA, you don't have to worry about RMDs. You can take out what you need and leave the rest in the account so it can continue growing.

3. It can help you reap the benefits of a Roth IRA even if you earn too much to contribute to one directly.

Most people can contribute up to $6,000 to a Roth IRA in 2019 or $7,000 if they're 50 or older, but the rules are different for higher earners. Single individuals who make between $122,000 and $137,000 in 2019 and married couples filing jointly who make between $193,000 and $203,000 can only contribute a reduced amount determined by the following formula:

  1. Start with your modified adjusted gross income (MAGI), which is your adjusted gross income (AGI) with certain tax deductions added back in.
  2. Subtract one of the following from your MAGI:
    1. $193,000 if filing taxes as married filing jointly or qualifying widow(er)
    2. $0 if married filing separately and you lived with your spouse at any point during the year
    3. $122,000 for all other tax filing statuses
  3. Divide the result from Step 2 by $15,000 for single individuals or heads of household or $10,000 for married couples filing jointly or separately or qualifying widow(er).
  4. Multiply the result from Step 3 by the maximum IRA contribution limit for the year ($6,000 in 2019 or $7,000 if you're over 50).
  5. Subtract the amount in Step 4 from the maximum IRA contribution limit for the year. The remainder is the amount you can contribute to a Roth IRA this year.

So if, for example, you're a single adult with a MAGI of $130,000 in 2019, you'd subtract $122,000, leaving you with $8,000. Then you'd divide that by $15,000 and multiply the result by $6,000, assuming you're under 50. That gives you $3,200. Subtract that amount from $6,000 and you're left with a maximum Roth IRA contribution of $2,800 for the year. Single individuals earning more than $137,000 and married couples earning more than $203,000 cannot contribute to a Roth IRA directly at all.

But there is another way. It's called a backdoor Roth IRA. This is where you contribute money to a tax-deferred retirement account and then convert the money to a Roth IRA in the same year. It's a little more hassle, but it enables you to take advantage of the tax-free growth you wouldn't otherwise have access to. Of course, given that you're likely to be in a high tax bracket today if you're making that much money, putting too much in Roth savings may not make as much sense unless you expect your high income to continue into retirement. If you anticipate your income dropping off, you may be able to save more in taxes by leaving your money in tax-deferred accounts.

A Roth IRA isn't the best place for everyone's savings, but if you think it may be a good fit for yours, consider opening a Roth IRA or doing a Roth IRA conversion. Just make sure you understand the tax implications of this move, both today and in the future.