What Is a Roth Conversion?
A Roth conversion is when you take funds from a Traditional IRA, 401(k), or other tax-deferred retirement account and transfer them into a Roth IRA.
- Traditional accounts (like 401(k)s and IRAs) give you a tax break today, but withdrawals are taxed later as ordinary income.
- Roth IRAs, on the other hand, are funded with after-tax dollars, and qualified withdrawals in retirement are completely tax-free.
When you convert, the amount moved is treated as taxable income in the year of the conversion. Once inside the Roth IRA, the money grows tax-free and can be withdrawn tax-free in retirement.
Why Consider a Roth Conversion?
There are several compelling reasons why investors—especially pre-retirees and retirees—consider Roth conversions as part of their financial plan.
1. Tax-Free Withdrawals in Retirement
The most obvious benefit of a Roth IRA is that qualified withdrawals are tax-free. This means no matter how much your account grows, you won’t owe taxes on distributions if you meet the requirements (age 59½ and account held for at least five years).
For clients worried about rising tax rates, Roth accounts provide a hedge against future tax increases.
2. Reduce Required Minimum Distributions (RMDs)
Traditional IRAs and 401(k)s are subject to RMDs starting at age 73 (as of 2025). These required withdrawals can push retirees into higher tax brackets, create Medicare premium surcharges, and reduce flexibility in retirement planning.
Roth IRAs, however, are not subject to RMDs during the account owner’s lifetime. This gives you more control over when and how you access your money.
3. Tax Diversification
Just as diversifying investments spreads risk, tax diversification spreads tax exposure. Having a mix of tax-deferred, taxable, and tax-free accounts allows for more flexibility in retirement. In years where income is higher, you can pull from Roth funds to avoid bumping into a higher bracket.
4. Legacy and Estate Planning Benefits
Roth accounts can be an excellent tool for leaving money to heirs. Since withdrawals are tax-free, beneficiaries inherit the account without facing immediate tax burdens (though they are still subject to distribution rules). This makes Roth accounts one of the most tax-efficient assets to pass down.
5. Hedge Against Future Tax Increases
With national debt rising and tax laws always subject to change, many experts believe tax rates may be higher in the future. Paying taxes now—when rates may be lower—could be advantageous over the long term.
Key Considerations Before Converting
While Roth conversions have clear benefits, they aren’t right for everyone. Consider the following:
- Current vs. future tax bracket: If you expect to be in a higher tax bracket in retirement, converting now may make sense. If your bracket will likely be lower later, it may not.
- Ability to pay taxes: It’s usually best to pay conversion taxes with funds outside the retirement account, so you’re not depleting savings.
- Impact on Medicare premiums: A large conversion can push your income higher, potentially increasing Medicare Part B and Part D premiums through IRMAA (Income-Related Monthly Adjustment Amount).
- Impact on other benefits: Higher taxable income can affect eligibility for tax credits, deductions, or even Social Security taxation.
Strategies to Maximize Roth Conversions
There are several strategies that make Roth conversions even more effective.
1. Multi-Year Conversions
Instead of converting a large amount all at once, many retirees spread conversions over several years. This helps avoid being pushed into a higher tax bracket in a single year.
2. Bracket Filling
This strategy involves converting just enough to “fill up” your current tax bracket without spilling into the next one. For example, if the 22% bracket ends at $190,750, you may convert only enough to keep taxable income below that threshold.
3. Low-Income Years
Roth conversions are most powerful during years when your taxable income is unusually low—such as the years between retirement and the start of RMDs or Social Security.
4. Market Downturn Conversions
Converting when account values are temporarily lower (such as during a market downturn) means you pay taxes on a smaller balance. Future growth then happens inside the Roth tax-free.
5. Coordinating with Estate Planning
For high-net-worth families, Roth conversions can be part of a larger estate planning strategy, reducing taxable income in retirement while leaving heirs with a more tax-advantaged inheritance.
Real-Life Example
Imagine you retire at age 62 with $1,000,000 in a Traditional IRA. You don’t plan to take Social Security until age 70, and RMDs won’t begin until 73. That gives you an 8-year window of relatively low taxable income.
By doing partial Roth conversions during those years—say $50,000 per year—you can shift $400,000 into a Roth IRA before RMDs begin. This reduces future RMDs, lowers your lifetime tax bill, and provides tax-free withdrawals when you need them most.