Roth Conversions: Are They the Right Move for You?

When and if to pull the trigger on this powerful tax strategy

If you're like many American workers, you've been diligently saving in your company retirement plan—your 401(k), 403(b), or similar account. Congratulations! But here's the catch: you may have inadvertently created a future tax problem for yourself.

What Is a Roth Conversion?

A Roth conversion involves moving money from a traditional IRA (or similar pre-tax retirement accounts like 401(k)s, 403(b)s, 457(b)s, Simple, and SEP plans) into a Roth IRA.

You'll pay income taxes on the converted amount now, but future withdrawals from the Roth IRA will be tax-free.

Why Should You Care About Roth Conversions Now?

The reality is that many retirees find themselves with the majority of their retirement savings in traditional IRAs—also known as tax-deferred accounts. Every dollar you withdraw from these accounts gets taxed as ordinary income. While this seemed like a good deal when you were getting those tax deductions during your working years, it can create significant challenges in retirement.

The Hidden Problems with Traditional Retirement Accounts

Higher Tax Rates in Retirement When you're forced to withdraw from traditional IRAs and 401(k)s—whether through required minimum distributions (RMDs) or simply to fund your lifestyle—you might find yourself in higher tax brackets than you anticipated. Additionally, we are currently experiencing historically low tax rates. Looking at historical trends, it’s plausible we could see higher tax brackets in the future.

The RMD Trap Starting at age 73 (or 75 born 1960 or later), you're required to take minimum distributions from traditional retirement accounts. These RMDs can push you into higher tax brackets whether you need the money or not.

IRMAA Medicare Penalties Higher income from IRA withdrawals can trigger Income-Related Monthly Adjustment Amounts (IRMAA), meaning you'll pay significantly more for Medicare premiums.

The "When Two Becomes One" Problem This situation becomes even more punitive for married couples. When one spouse passes away, the surviving spouse inherits the deceased spouse's IRA but must file as single—potentially doubling their RMD tax burden while losing the benefit of married filing jointly tax brackets.

Limited Tax Planning Flexibility Having most of your assets in one account type (traditional tax-deferred) gives you little flexibility to manage your tax situation in retirement. The ability to draw from different sources throughout retirement is crucial to optimizing a tax-efficient retirement. If assets are solely in traditional IRAs, there are few levers to pull to optimize your tax plan.

Legacy Planning Complications If you want to leave assets to your children or other non-spouse beneficiaries, traditional IRAs create tax headaches. Your heirs will face income tax spikes when they inherit these accounts, whereas Roth IRAs pass tax-free and brokerage accounts receive a stepped-up basis. Additionally, traditional IRAs must adhere to strict RMD rules whereas Roth IRAs only need to be fully distributed by year 10 of being inherited.

How Roth Conversions Work

Before Age 59½ You can convert portions of your traditional IRA to a Roth IRA, paying income taxes on the converted amount. You'll need to pay these taxes from other assets (not from the IRA itself to avoid early withdrawal penalties).

After Age 59½ You have more flexibility—you can pay the conversion taxes either from other assets or from the conversion itself. Each approach has trade-offs:

Using other assets to pay taxes: Allows more of your converted dollars to grow tax-free but draws down your other accounts (like bank or brokerage accounts)

Example: Sue and Gary are both 62 and not yet taking Social Security. They have $105,000 in other income this year and decide to convert $100,000 total from their traditional IRAs to their existing Roth IRAs (which are over 5 years old). This puts them in the 22% marginal tax bracket, generating roughly $22,000 in additional taxes.

They choose to pay this tax bill from their high-yield savings account, allowing the full $100,000 to remain in their Roth IRAs and grow tax-free. Since they're over 59½ and their Roth IRAs satisfy the 5-year rules (explained below), any future withdrawals will be completely tax and penalty-free.

Using IRA funds to pay taxes: Preserves your other assets for emergencies and liquidity needs but reduces the converted assets

Example: Using the same scenario, Sue and Gary instead choose to pay the $22,000 tax bill directly from their conversion. This means only $78,000 actually makes it into their Roth IRAs, but they preserve their savings account for emergencies.

The converted $78,000 can be withdrawn tax and penalty-free anytime since they're over 59½. However, any future growth on these funds must wait until their Roth IRAs satisfy the 5-year rules (see below) before being withdrawn tax-free.

Note: These are simplified calculations that don't account for standard deductions, which would reduce the actual tax bill. For married filing jointly in 2025, the standard deduction is $30,000. Additionally, state income taxes apply and vary significantly by state, potentially adding thousands to your conversion tax bill, or nothing at all if you live in one of the few states with no income tax.

Making the Conversion Happen

So, you've crunched the numbers and decided a Roth conversion is right for you. Great! Now, how do you actually do it?

First things first, you'll reach out to your IRA custodian – that's the brokerage firm or bank that holds your traditional IRA. They're usually set up to guide you through the process. Many custodians have straightforward online tools or step-by-step tutorials on their websites for initiating a Roth conversion. A quick call or a look at their "help" section should get you pointed in the right direction.

Don't Forget the Tax Man! This is a critical step. When you convert, you're adding taxable income to your current year. So, you'll owe taxes on that converted amount.

If you're paying the conversion tax from cash outside your IRA (which, as we discussed, is generally the most effective way), you'll want to take care of that tax bill promptly. Think of it as making an estimated tax payment. You'll need to figure out which marginal tax bracket your new total income falls into (your regular income plus the conversion amount) to estimate the additional tax owed.

Don't hesitate to consult with a tax professional for guidance; they can help you calculate the estimated amount owed. You can pay your estimated taxes directly to the IRS online (through IRS.gov/payments) or by mail using Form 1040-ES. Paying it right away avoids underpayment penalties come tax time.

Understanding the Two Critical 5-Year Rules

When it comes to Roth IRAs, there are actually two different 5-year rules you need to understand—and they serve different purposes:

Rule #1: The "First Roth Contribution" 5-Year Rule This rule determines when you can withdraw earnings from your Roth IRA completely tax-free. The clock starts on January 1st of the tax year when you made your very first contribution to any Roth IRA. So if you first contribute in December 2024, your 5-year period actually begins January 1, 2024.

To withdraw earnings tax-free and penalty-free, you must satisfy this 5-year rule AND meet one of these conditions:

• You're age 59½ or older
• You're disabled
• You're using up to $10,000 for a qualified first-time home purchase
• The distribution is made to your beneficiary after your death

Rule #2: The "Roth Conversion" 5-Year Rule This rule applies specifically to money you convert from traditional retirement accounts. Each conversion starts its own separate 5-year clock, beginning January 1st of the conversion year.

Here's what matters: If you're under 59½, you generally must wait 5 years before withdrawing that specific converted amount without facing a 10% early withdrawal penalty. However, if you're already 59½ or older when you convert, this penalty doesn't apply to the converted principal.

Important note: Even after 59½, any earnings on your converted funds are still subject to the first 5-year rule for tax-free treatment.

A Crucial Note on Pro-Rata Rules: If you have a traditional IRA that contains both pre-tax (deducted contributions or 401k rollovers) and after-tax (non-deductible) contributions, be aware of the IRS's "pro-rata" rule. This rule states that every conversion or distribution from any of your traditional IRAs will be treated as a mix of both pre-tax and after-tax money, even if you try to convert only the after-tax portion. Calculating this can get complex and is beyond the scope of this article. If you have any non-deductible IRA contributions, it's highly recommended to consult a tax professional before attempting a conversion to understand how the pro-rata rule might impact your tax liability.

When Roth Conversions Don't Make Sense

While Roth conversions offer significant advantages, they aren't universally beneficial. It's important to consider your specific financial situation. A Roth conversion might not be the right strategy for you if one or more of the following circumstances apply:

You already hold a balanced mix of account types. If your investments are already well-distributed across taxable brokerage accounts, Roth accounts, and traditional pre-tax retirement accounts, the additional benefit of converting more funds might be minimal. Maintaining diversity in how your assets are taxed (or not taxed) can be a sound strategy on its own.

Leaving a financial legacy isn't a primary goal. If your estate plans don't prioritize passing wealth to individual family members, the unique tax-free distribution benefits of an inherited Roth IRA become less relevant.

Your main beneficiary is a charity. Charities generally operate as tax-exempt entities. This means they typically won't pay income tax on inherited traditional IRA assets. Converting to a Roth IRA to benefit a charity would effectively mean you pay taxes now on funds that the charity would eventually receive tax-free anyway, resulting in no added tax advantage for them.

You lack sufficient liquid funds to cover the conversion taxes. To maximize the growth of your Roth IRA, it's typically best to cover the conversion tax with cash from your non-retirement accounts. If you don't have enough available cash and would need to withdraw money from the IRA itself to pay the tax bill, you'd prematurely reduce your retirement savings. Furthermore, if you're under 59½, such a withdrawal could incur additional taxes and a 10% early withdrawal penalty.

The conversion pushes you into a higher Medicare IRMAA bracket. The additional income from a Roth conversion increases your Modified Adjusted Gross Income (MAGI). If this increase pushes your MAGI above certain thresholds, it can lead to higher Medicare Part B and Part D premiums in future years, known as Income-Related Monthly Adjustment Amounts (IRMAA). If avoiding these surcharges is a priority, careful planning to stay below these thresholds is essential.

You're a single filer and other points mentioned apply. Single filers face narrower tax brackets and lower IRMAA thresholds compared to married individuals filing jointly. If you're single and find several of the above considerations resonate with your situation, a Roth conversion might present more downsides than advantages for your current financial plan.

Alternative Strategies for Traditional IRAs

If you decide against conversions, you can still optimize your traditional IRA through:

• Qualified Charitable Distributions (QCDs) after age 70½
• Charitable legacy planning
• Using IRA funds for qualifying medical expenses (when they exceed 7.5% of your adjusted gross income)

Timing Your Roth Conversions

The Sweet Spot Many advisors talk about the "retirement sweet spot" for Roth conversions. Ideally, this is the window after you've stopped working but before you start taking Social Security. Why is it so sweet? Your income is typically lower during this period – no more salary coming in, and you haven't yet added Social Security benefits to your taxable income. Plus, you might have higher deductions, especially if you're covering medical expenses before Medicare fully kicks in, making those conversions even more tax-efficient.

It's a great idea in theory, but here's the reality check: relying on this narrow window can be a bit aggressive. Life often throws curveballs. There's no guarantee you'll have this "sweet spot" exactly as planned. What if health issues force you to work longer than you intended? Or, tragically, what if you become a widow or widower? These events can drastically alter your income, tax brackets, and planning horizons, potentially closing or shifting that ideal conversion window.

That's why it's crucial to be flexible and consider conversions at other times too.

While Still Working (Under 59½) If your employer offers a Roth option in your retirement plan, start directing some contributions there. If you're looking to convert a rollover IRA, consider small conversions if you have extra cash to pay the taxes.

Already Retired and Taking Social Security This can still be an excellent time to convert, as your income is likely lower than during your working years.

Special Timing Opportunities If your spouse recently passed away, you have until the end of that calendar year to convert at married filing jointly tax rates.

How Much to Convert?

Once you've decided a Roth conversion makes sense for you, the next big question is: How much should I convert? This isn't a one-size-fits-all answer. The "right" amount depends heavily on your unique financial picture and long-term goals. Here are the key questions to ask yourself when determining your annual conversion amount:

How much liquid cash do you have available to comfortably pay the income tax? As we discussed, it's generally most beneficial to pay the conversion tax from funds outside your retirement accounts. This allows the full converted amount to grow tax-free in your Roth IRA. Look at your savings, taxable brokerage accounts, or other accessible funds. Do you have enough to cover the tax bill without straining your emergency fund or impacting your near-term liquidity? This often sets the practical upper limit for your conversion in a given year.

What tax brackets (based on your Modified Adjusted Gross Income, or MAGI) do you want to fill? Is IRMAA a consideration as well? This is where careful tax planning comes into play.

• "Filling the Bracket": You might aim to convert just enough to fill your current tax bracket (e.g., the 12% or 22% bracket) without pushing into the next, higher one. This is a common strategy to maximize conversions at your lowest possible tax rate.
• Strategic Overfill: Alternatively, you might decide to convert a bit more, intentionally pushing some income into the next marginal bracket (e.g., from 22% to 24%). This could be a smart move if you believe that the next bracket is lower than what you might face in retirement or what future tax rates could be.
• IRMAA Awareness: Always keep Medicare's Income-Related Monthly Adjustment Amounts (IRMAA) in mind. A significant conversion can increase your MAGI, potentially triggering higher Medicare Part B and Part D premiums two years down the road. If avoiding IRMAA is a priority, you'll need to carefully calculate how much you can convert without crossing those income thresholds.

What balance of asset classes are you looking to achieve across your different account types? Think about your overall portfolio. Are you trying to have roughly one-third in taxable, one-third in tax-deferred (Traditional), and one-third in tax-free (Roth)? Or do you have a different ideal allocation? Your Roth conversions are a powerful tool to shift this balance over time. If you have a large amount in traditional accounts and very little in Roth, larger conversions might be appropriate to reach your desired diversification faster.

How many years does making conversions make sense for you? Can you spread it out over low tax years or do you need to do larger conversions in a shorter period of time? Consider your income trajectory. Do you anticipate certain years with lower income (e.g., early retirement, a sabbatical, a career transition, or years before Social Security kicks in)? These "low tax windows" are prime opportunities for efficient conversions. Spreading conversions out over several years can help manage your annual tax bill and adapt to changing tax laws. However, if you have a specific goal (like emptying your traditional IRA before RMDs start) and limited time, larger, more aggressive conversions in a shorter period might be necessary. By thoughtfully addressing these questions, you can tailor your Roth conversion strategy to align perfectly with your financial goals, tax situation, and timeline.

Is a Roth Conversion Right for You Right Now?

Before you make any moves, ask yourself these key questions:

✓ Am I in a low tax year? Consider whether you can manage your income this year to stay in a lower bracket for the conversion.

✓ Do I have cash available to pay the conversion taxes? You'll want money outside of retirement accounts to cover the tax bill. Using the converted funds themselves can trigger additional complications.

✓ Can I leave this money alone for at least 5 years (if applicable)? Remember those 5-year rules we discussed earlier—you'll want to avoid early access to converted funds.

✓ Have I considered the Medicare impact (if applicable)? Higher income from conversions could trigger IRMAA surcharges that increase your Medicare premiums. Crucially, remember the two-year lookback period: your MAGI from this year will directly influence your Medicare premiums two years from now.

Checking "yes" on these questions doesn't automatically mean you should convert, but it suggests you're in a good position to seriously explore the strategy. The key is running the actual numbers for your specific situation.

The Bottom Line

Every situation is unique. Don't let anyone tell you that you must convert your IRA without first analyzing the costs and benefits specific to your personal situation. The key is finding the right balance and timing that works for your circumstances.

Consider working with a financial advisor or tax professional who can model different scenarios and help you determine whether Roth conversions make sense for your specific situation.

This blog post is intended for educational and informational purposes only. The views expressed are solely those of the author and do not represent professional financial advice. While every effort has been made to ensure the accuracy of the information presented, it should not be relied upon as a substitute for individualized advice from a qualified financial advisor. Financial decisions are complex and personal, and readers are strongly encouraged to conduct their own due diligence and seek professional guidance before making any investment or financial planning choices.