I’m a big Roth IRA proponent, so it’s actually tough to write about the reasons not to go Roth. But, as with any other financial decision, there are drawbacks that must be addressed. When I say “Roths,” I’m talking about Roth conversions as opposed to Roth contributions. Roth conversions have no income limits, and there are no limits on how much can be converted. Clients can convert all they wish as long as they can pay the income tax.

Before I begin, though, let the record show that I am still a big Roth IRA fan because of the two biggest of its long-term benefits:

1. It offers tax-free distributions in retirement (including tax-free stretch Roth IRAs for heirs).

2. It has no lifetime required minimum distributions (RMDs) when clients reach age 70 1/2.

Roth IRAs also remove clients’ uncertainty about the future of taxes, including possible higher taxes that could affect their retirement savings.

Younger savers with Roths have the benefit of decades of tax-free compounding. Without exception, it’s a good idea for younger savers.

Who Should Not Convert To A Roth IRA?

But there are exceptions for everybody else. Here are 12 factors to consider before advising a Roth conversion:

1. The Up-Front Tax Bill

Anyone who just can’t write that check should not be doing a Roth conversion. Let it go. That’s the No. 1 obstacle for clients, even after you explain to them the long-term tax-free Roth benefits. The up-front tax hit is an even more important concern this year, since the Tax Cuts and Jobs Act eliminated people’s ability to undo a Roth conversion for 2018 and future years. 2017 Roth conversions can still be reversed up to October 15, 2018, but after that, that’s it. No more recharacterizations.

Once clients convert, they are committed to the tax bill. You’ll need to make sure they understand this. Clients may worry about being locked in to paying a tax now without having the time to know the true cost (which won’t be until tax time the following year).

2. Tax Rates

The fundamental principle of tax planning is to always pay taxes at the lowest rates. The best situation is for clients to take deductions when tax rates are higher and pay taxes when the rates are lower. Those planning Roth conversions must know whether clients will be in a lower or higher tax bracket when they retire. If they’re in a lower bracket, they should avoid converting to a Roth now.

As we switch from the old (pre-2018) tax system to the new one, some clients will not really know how their taxes will play out, especially if they are now taking the standard deduction and may be losing out on personal exemptions and other benefits that they were used to. But in many cases, those lost tax benefits may be made up with lower tax rates and a higher standard deduction.

You really won’t know for sure until you can actually look at the completed 2018 tax return with all the new bells and whistles. Anything can come up that you or the client did not see coming, whether it’s increased income, unexpected deductions, business losses or other items that can throw a monkey wrench into even the best projections. If you cannot be confident in projecting the actual tax that a Roth conversion might generate, then maybe you should have these clients hold off on a Roth conversion for now. Another option might be for them to test the waters by making a smaller conversion that keeps them from moving into a higher tax bracket.

3. Beneficiary’s Tax Rates

In addition to projecting your clients’ tax rates, you should look further into the tax rates of their beneficiaries. If collectively the beneficiaries will be in lower tax brackets, a conversion may not be warranted. You might have to look at each beneficiary here. One child might be in a very high tax bracket and benefit from inheriting a Roth IRA. Another child might be in a low bracket, which means the tax he or she pays on required distributions from a traditional inherited IRA wouldn’t be that great. In that latter case, a Roth conversion is not necessary. Note, however, that the conversion decision must be made by the IRA owner in the first place, since non-spouse IRA beneficiaries cannot convert an inherited IRA to an inherited Roth IRA. However, in a tax law quirk, named beneficiaries who inherit company plan funds, like 401(k)s, can convert them to an inherited Roth IRA. Go figure.

Also keep in mind: Multiple beneficiaries = less tax on distributions.

When looking ahead at a beneficiary’s future tax bracket, take into account the splitting of the graduated rates over the returns of multiple beneficiaries (if there is more than one). Multiple beneficiaries get the funds split among them, so overall they will pay less tax. For example, one person who reports a $30,000 taxable IRA distribution will likely pay more tax than three people who report $10,000 each. They can each use up their lower brackets, thus lowering the overall tax.

4. Side Effects Of Roth Conversions—Stealth Taxes

A Roth conversion increases a person’s adjusted gross income, which in turn may trigger other “stealth taxes.” These are additions to the tax bill that come from losing tax deductions, credits or other benefits tied to AGI. For example, medical deductions, child tax credits, the taxation of Social Security benefits or even the potential loss of the new 20% deduction for qualified business income (the Section 199A deduction). Increased income can increase Medicare premiums too, or impact financial aid eligibility.

While these might be reasons to avoid a Roth conversion, they are only short-term blips in tax planning, because the additional taxes would only be for the year of the conversion. But if this bothers your clients, I would explain to them that they have to look at the bigger picture: that is, the long-term benefit of the Roth IRA. The tax cost is a one-time, short-term expense to gain a greater benefit throughout retirement.

5. Financial Aid

Financial aid may be affected by a spike in income from a Roth conversion, so timing here is critical, especially when a large chunk of needed money might be at risk. While retirement accounts are generally excluded for financial aid, income is not. For clients who need the aid and could suffer from a spike in income, a Roth conversion may have to be put on hold until assistance is no longer needed.

6. Money Is Needed Sooner, Not Later

If the client will need to access the Roth funds sooner rather than later, that’s a vote against a Roth conversion. The tax cost may not be worth the benefit if the funds are not given time to grow. One good tell: If the clients are asking how soon the Roth funds can be accessed, then they are not good candidates for a conversion. The big Roth benefit is in the tax-free compounding of the money in the account over time. Roth conversions are not for getting money to use in the near term.

7. Where Does The Conversion Money Come From?

Even if clients want to convert, they’ll need to know for sure that the money will be there to pay the tax bill. Again, under the new law, there’s no going back. The conversion is permanent. The taxes will be owed. If the only funds available to pay the tax bill are in the IRA itself, then the clients shouldn’t do the conversion. That would immediately diminish the amount converted. Besides that, any IRA funds used to pay the tax would not only be taxable but also subject to the 10% early distribution penalty if the client were under age 59 1/2 (and there were no exceptions applied).

8. Over 701/2 And Subject To RMDs

In general, older clients should avoid a Roth conversion. The tax benefit they get next to the amount they pay in taxes in their remaining lifetime is not worth it, except if the plan is to leave that Roth to younger beneficiaries who can stretch the benefit out over their own lifetimes. Even so, once a client reaches age 70 1/2 and becomes subject to required minimum distributions, it’s more expensive to convert to a Roth. That’s because the first dollars distributed from the IRA are deemed to satisfy the RMD and RMDs cannot be converted. You would first have to withdraw the distribution amount, and then the remaining IRA funds would be eligible for conversion. But then the tax cost is increased since you are paying tax on the RMD amount that does not end up in the Roth IRA. This would not be cost effective unless there were large deductions or losses to keep the taxes low on the Roth conversion. Remember that you are always looking at the additional tax cost of the Roth conversion as a key factor in deciding whether a conversion will be tax-efficient over the long haul.

9. The Effect Of Qualified Charitable Distributions

These distributions are tax savers. They can increase the tax benefit of gifting. The donation goes directly from the IRA to charity. But the charitable distribution is only for IRA owners or beneficiaries who are 70 1/2 years old or older. However, if these clients are also subject to required minimum distributions and using their IRA for making donations via the qualified charitable distribution, it’s better not to convert to a Roth IRA since the charity distribution is already removing taxable IRA funds at no tax cost anyway. Never do this with Roth IRAs, since those are after-tax funds. In fact, after-tax funds don’t qualify for the qualified charitable distribution. If the client’s plan is to primarily use their IRA for making donations (and that’s a good tax planning strategy), then the charitable distribution is the better move and the clients should not be doing a Roth conversion. One exception is if they want to carve out a portion of their IRA they wish to leave to children or grandchildren. Then a Roth conversion would work for those funds.

10. Future Medical Expenses

If clients need to tap IRA funds to pay heavy out-of-pocket medical expenses in retirement (which won’t be reimbursed with insurance), then the Roth conversion is yet again a bad choice. The medical expense deduction survived tax reform (it’s now limited by a 7.5% AGI threshold in 2018 and then a 10% threshold for 2019 and later years). The deduction may be used to offset the tax on future IRA distributions. This, of course, assumes that the medical bills will be high enough to itemize, given the new expanded standard deduction.

You wouldn’t want to do a Roth conversion and then have those medical deductions wasted or, even worse, paid from after-tax funds in a Roth IRA. For older clients, some bigger medical expenditures may be more easily anticipated. The clients may already know they will need to make major investments in medical equipment or home improvements, specifically for medical care items such as elevators, chairlifts, widened hallways, doorways for wheelchairs, or other wheelchair access renovations such as exit ramps. Additional outlays might be needed for railings, support bars or bathroom modifications, to name a few things. These are big ticket items that could easily offset the tax on even larger IRA distributions.

While home improvements are generally not deductible, they are if their main purpose is to provide medical benefits. These modifications should not increase the value of the home (they rarely do and often reduce home values). Medical modifications in rental units are fully deductible since the apartment is not owned.

The same is true if your client may have to pay medical expenses for a dependent besides a spouse, like a parent, child or other qualifying relative.

11. Opportunity Cost

A big issue for both clients and financial advisors is assessing the opportunity cost of paying tax up front. The argument is that the funds that were used to pay Uncle Sam could have been invested. That’s true, but the invested funds could also have produced losses. Let’s say, based on the investment, you could have reasonably projected a return and that opportunity is now gone because the funds were used to pay the tax.

You can’t look at only the potential cost without comparing it with a long-term benefit. You’d have to look again at the two big benefits I cited earlier: the years of tax-free compounding and no required minimum distributions. Then add in the benefit of removing the risk of future higher tax rates in retirement. You have to evaluate both sides of the equation. The money paid in taxes may seem lost, but there is a return on that money in the long-term, tax-free accumulation in the Roth IRA.

However, if the client has a certain investment opportunity (which also comes with respective risk) then you’d have to weigh that and see if the funds might be better employed in that investment opportunity.

12. The Risk That The Law Will Change At A Later Date

This is the most common question I hear from consumers. But I don’t believe it’s a reason to avoid Roth conversions. No one knows for sure if a money-hungry Congress would change the rules, but based on their track record over the years the Roth has been in existence, that is not likely. Why? Even Congress realizes that the Roth IRA is a cash cow for the government, albeit a short-term one. Legislators don’t look at the long term. They look at short budget cycles. And in the short term, Roth IRAs bring in money because Congress gets its cash fix from taxes paid up front. A tax on these accounts would kill Congress’s secret golden goose.

So there you have it. There are two sides to the Roth decision and clients will need financial advisors more than ever for a professional and thorough evaluation. There’s real value in that.

© Ed Slott and Company. LLC. Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. He will be a keynote speaker at Financial Advisor's Inside Retirement conference in Las Vegas on September 27. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group℠, please visit www.IRAhelp.com.