Answer This Question Before You Convert Your IRA

A new tax law just took effect that could make you rich. If you haven't considered whether you should convert to a Roth IRA yet, then you might be missing out on the opportunity of a lifetime. But even with all the benefits that Roth IRAs offer, they're not for everyone.

Many financial experts believe that doing a Roth conversion makes sense for many investors. But to give the other side of the coin, I've taken a look this week at several reasons why you might not want to convert to a Roth might not make much sense. Among the reasons you might want to opt out of Roth conversions are that you think your tax rate will be lower after you retire, that you don't have a long enough time horizon to take full advantage of the conversion, or that converting will have the hidden cost of causing you to lose other valuable tax benefits.

To close out this series, let's turn to a question that many people never ask themselves: who will end up spending your IRA money? Although the answer may seem obvious, it often turns out not to be -- and it can have a dramatic impact on whether or not you should convert.

Leaving your legacy
When you start saving for retirement, you naturally think that eventually, you'll get around to spending the money you've set aside. After all, what good is that nest egg if you never use it?

But in reality, there are many reasons motivating retirees to do their best not to spend down their retirement accounts. For instance:

• Taxes. You have to pay tax when you withdraw money from a traditional IRA. Most people hate paying tax, so they put it off as long as possible.
• Preserving principal. Once you retire, your mind-set becomes geared toward living on income and keeping your principal untouched. For many, that means leaving the bulk of your assets inside their retirement accounts.

The net result of this is that many people still have a lot of money in their retirement accounts when they die. In considering whether to convert to a Roth, a key factor is who you expect to inherit any remaining money.

Charity vs. children
Given how intricate the conversion decision is, it's nice to have a hard-and-fast rule sometimes. Here's one: if you plan to leave your IRA to charity, don't convert it to a Roth.

The reason is simple: charities don't have to pay income tax when they receive IRA money. So if you convert to a Roth, all you're doing is costing yourself money in taxes -- and every dollar you pay to the IRS is one less dollar that your charity will receive.

On the other hand, if you expect to leave your IRA to your spouse or children, then there's more incentive to convert. That's because your spouse can rollover your Roth to a Roth of her own. And although your children can't do that, they can stretch out the money they receive from your Roth IRA for their entire lifetimes.

Think about the amount of tax-free growth that can bring. With the potential for your Roth to last 40 years or more after you pass away, the right stocks could make your heirs rich. Just look at how some stocks have done over the past 40 years:

Source: Yahoo Finance. Assumes 35% tax rate on traditional IRA distributions to heirs.

With that much money on the line, converting can make sense even for those nearing the end of their lives.

Make the right choice
In this series of articles, I've tried to address several of the concerns that people have about converting to a Roth IRA. The fact is, though, that everyone's situation is slightly different, and so it's very hard to rely on general advice. By knowing what issues to focus on, though, you can make a better decision that address your own particular needs.