How Will You Pay the Roth Conversion Tax?
If you have to raid your traditional IRA to pay the conversion tax — don't convert. It's just too big a hit to your nest egg, and you are unlikely to ever fully recover. Consider a $500,000 traditional IRA for someone who is in the 28% tax bracket and converts the full amount to a Roth. This person will owe immediate tax of $140,000 (over two years, if the person acts this year) and, assuming the person is under age 59.5, would owe an early-withdrawal penalty (10%) of $50,000 as well — leaving just $310,000. Using conservative growth and withdrawal estimates, this person would be better off staying with the traditional IRA even if he or she lived another 40 years. But if you pay the conversion tax from other sources, yes, you'll have to absorb the up-front tax hit, but your nest egg will get a huge one-time boost. If you also expect your tax rate to decline, a conversion probably makes sense.
See if you should convert to a Roth IRA:
Introduction: Traditional IRA vs. Roth IRA
What Are Your Tax Assumptions?
When Will You Start Making IRA Withdrawals?
Will You Convert Your Entire IRA Or Just Part?