Roth Conversions Explained: When They Make Sense

You’ve been saving in your 401(k) or traditional IRA for years, maybe decades. Every contribution reduced your taxable income at the time, and you probably felt good watching that balance grow. But here’s the thing nobody tells you clearly enough: every dollar in that account is a future tax bill. When you withdraw it, whether voluntarily or because you’re required to, you’ll owe ordinary income tax on every penny.

A Roth conversion lets you move money from those pre-tax accounts into a Roth IRA, paying the tax now in exchange for tax-free growth and tax-free withdrawals later. You’re paying a bill today that you’d otherwise pay tomorrow. But in the right circumstances, paying it now, at a tax rate you can control, can save you and your heirs a meaningful amount over time.

How a Roth conversion works

The mechanics are straightforward. You take money from a traditional IRA, traditional 401(k), or similar pre-tax account and move it into a Roth IRA. The amount you convert is added to your taxable income for the year, and you pay ordinary income tax on it. Once the money is in the Roth, it grows tax-free and can be withdrawn tax-free in retirement, as long as the account has been open for at least five years and you’re 59½ or older.

There’s no income limit on who can do a Roth conversion. That’s different from Roth IRA contributions, which do have income phase-outs. Regardless of how much you earn, you can convert. And there’s no limit on how much you can convert in a single year. The only constraint is how much tax you’re willing to pay.

Why the timing matters more than the strategy

A Roth conversion is only valuable if you pay tax at a lower rate today than you would in the future. That’s the entire calculus. Several situations create windows where a conversion becomes especially attractive. The most common is the gap between retirement and the age when required minimum distributions (RMDs) begin. If you retire in your early 60s but don’t start Social Security or take RMDs until your 70s, you may have several years of unusually low income. That’s a natural conversion window, because your tax bracket may be as low as it’ll ever be.

Other windows open after a year of lower-than-expected business income, during a market downturn when account values are depressed (allowing you to convert more shares at a lower tax cost), or in years when deductions are unusually high. Roth conversions aren’t something you do once. They’re a tool you revisit every year, looking for the right moment.

The RMD problem

Required minimum distributions are the IRS’s way of eventually collecting the tax they deferred when you made those original contributions. Once you reach the required age, you’re forced to take a minimum amount out of your pre-tax accounts every year, whether you need the money or not. For people with large pre-tax balances, RMDs can push them into higher tax brackets and increase the cost of their Medicare premiums through IRMAA surcharges.

A Roth IRA, by contrast, has no RMDs during the owner’s lifetime. Money can sit and grow indefinitely. By converting pre-tax money into Roth dollars before RMDs begin, you’re reducing the balance that future RMDs are calculated on. That gives you more control over when and how much income you take in retirement.

The inheritance angle

When a non-spouse beneficiary inherits a traditional IRA, they’re generally required to withdraw the entire balance within ten years and pay income tax on every dollar. That can be a significant and unexpected tax hit, especially if the heir is in their peak earning years. When they inherit a Roth IRA, the same ten-year window applies, but the distributions are tax-free. If leaving a financial legacy is part of your plan, Roth conversions are one of the most direct ways to increase what your family actually keeps.

What to watch out for

The most common mistake is converting too much in a single year and pushing yourself into a much higher tax bracket. The goal is to “fill up” your current bracket, not spill into the next one. You also want to pay the tax with money from outside the conversion. If you use a portion of the converted funds to cover the tax bill, you’ve reduced the amount that gets to grow tax-free.

Be mindful of the “IRMAA lookback.” Because Medicare premiums are based on your tax returns from two years prior, a large conversion in 2026 could result in higher Medicare costs in 2028. Remember, each conversion has its own five-year clock before the converted amount can be withdrawn penalty-free if you’re under 59½.

The most effective use of Roth conversions is as a multi-year strategy: small, intentional conversions over time, timed to your income and tax situation. Done well, it shifts a meaningful portion of your savings from “taxable later” to “tax-free forever.” That’s a shift that pays dividends not just for you, but for the people you leave behind.

Sources
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
https://www.irs.gov/pub/irs-pdf/p590a.pdf
https://www.irs.gov/pub/irs-pdf/p590b.pdf

This information is provided as general information and is not intended to be specific financial guidance.  Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed.