SMART INVESTOR: Roth IRAs Aren't Always The Perfect Way To Save For Retirement

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The Roth IRA is one of the most talked about and least understood financial tools.

Traditional retirement investment vehicles are paid pre-tax and incur taxes every time you withdraw from them in retirement. With a Roth, you pay today's tax rate on contributions and aren't taxed on any future withdrawals as long as you meet certain qualifications.

What's confusing for consumers isn't weighing the pros and cons of Roth IRAs as much as the concept. It's the choice between leaving savings in a traditional IRA or converting them into a Roth account of their own.

We asked ChFC Mike Piershale, resident retirement expert and president of Piershale Financial Group, to explain which types of investors should steer clear of Roths.

People expecting to use their IRA as income in retirement. If you're approaching retirement or and need to draw funds from the IRA to live on, it's not wise to convert to a Roth, Piershale says. Why? "Converting to a Roth costs money and it takes a certain number of years before the money you pay upfront is justified by the tax savings," he says. "This timeline is greatly increased if you're taking income." (Use a Roth conversion calculator like this to get an idea of whether you're better off converting.)

Anyone who can't afford it. If you have to use funds from your traditional IRA in order to pay the taxes it will cost you to convert to a Roth, you're better off letting the funds sit tight. "This is a huge and very reasonable reason not to do a Roth conversion," Piershale says. "It just wouldn't make sense."

Those who will retire in a lower income tax bracket than they're in now. For example, an IRA owner in the 25 percent tax bracket today (making about $70,700 in taxable income for those married and filing jointly), it wouldn't make sense to pay 25 percent on a Roth IRA conversion if you're planning to retire in the 15 percent tax bracket. "It'll be cheaper to wait until you retire and convert at a 15 percent tax rate, which will result in substantial tax savings," he says. "That's a huge tax savings."

Parents who don't want to cut their kids a deal. One of the perks of Roth IRAs is that they are excellent vehicles when uses trusts as beneficiaries. That's because trusts typically trigger a lot more taxes on a let less income. But with a Roth, heirs can make withdrawals forever without tax penalties. "You're leaving a sweeter deal to your kid if you leave them a Roth IRA than if you leave them a traditional IRA," Piershale says. "They can set up something called an inherited IRA."

Anyone who doesn't want to pay the income tax upfront. Piershale himself admits the thought of converting his traditional IRA into a Roth stings when he considers how much he'll be paying upfront in taxes. It's a common concern that keeps some IRA owners from making the switch. "Can you imagine someone has a $300,000 IRA and right upfront they're giving up $75,000 of that IRA?" he says. "[A Roth IRA conversion may] look good on paper when you're running a pure math calculation but in the real world, a lot of things happen. They have a health problem or something happens where they need a lot more money a lot faster."