It’s not hard to understand why Roth IRAs are popular – who wouldn’t want to build up a savings account that can provide tax-free income during retirement? But contributing to a Roth can be difficult to do as it requires compensation income, and total income that falls under a certain threshold. Fortunately, there is a second way to fund a Roth IRA – the Roth conversion.
A Roth conversion simply means withdrawing, or converting, funds from your Traditional, pre-tax retirement savings account, like an IRA or 401k, and moving them to the Roth account. Doing a conversion does mean you have to pay upfront tax on the amount converted from the original savings account, but once it’s moved to the Roth account, any growth inside the Roth can be withdrawn completely tax-free, as long as you follow a few basic rules. And anyone can do a Roth conversion, regardless of age, income level or work status. As long as you have an existing retirement account, those funds can very likely be converted to a Roth account.
But doing a Roth conversion can be an expensive proposition. Remember that a Roth conversion is really a choice to pay tax on your retirement savings today, in exchange for tax-free growth for the future. Because of this up-front tax cost, you need to carefully evaluate whether a Roth conversion is really in your best interest.
At Baird, we help individuals analyze a Roth conversion strategy by focusing on three key tests:
Are you staring at your traditional IRA statement and wondering if converting to a Roth IRA might be a smart move? You’re not alone. This question keeps many investors up at night, especially as retirement planning becomes more complex and tax situations evolve.
As a financial advisor who’s guided hundreds of clients through this decision I can tell you that there’s no one-size-fits-all answer. But I can help you understand the factors that should influence your decision.
What Exactly Is a Roth IRA Conversion?
Before diving into the “should I” part, let’s make sure we’re all on the same page about what we’re discussing
A Roth IRA conversion is essentially moving money from a traditional IRA (or other eligible retirement accounts like 401(k)s, SEPs, or SIMPLE IRAs) to a Roth IRA The key difference? With traditional IRAs, you contribute pre-tax dollars and pay taxes when you withdraw money in retirement. With Roth IRAs, you contribute after-tax dollars and can withdraw money tax-free in retirement (assuming certain conditions are met)
When you convert, you’re essentially agreeing to pay taxes now instead of later. It’s like ripping off the band-aid – it might hurt a bit now, but you won’t have to worry about it down the road.
Who Can Convert to a Roth IRA?
Here’s some good news: anyone with a traditional IRA can convert to a Roth IRA, regardless of income level. This is particularly valuable because Roth IRA contributions themselves have income limits.
For 2025, if you’re a single filer with a modified adjusted gross income (MAGI) over $165,000, or married filing jointly with MAGI over $246,000, you can’t contribute directly to a Roth IRA. But conversion? That door remains wide open.
This loophole (sometimes called a “backdoor Roth IRA”) allows high-income earners to still access the benefits of a Roth IRA through conversion.
9 Crucial Factors to Consider Before Converting
1. Your Current vs. Future Tax Bracket
This is perhaps THE most important consideration. The fundamental question is: Will you be in a higher or lower tax bracket in retirement compared to now?
If you expect to be in a higher tax bracket during retirement, converting now might make sense since you’ll pay taxes at today’s lower rate. On the flip side, if you anticipate being in a lower bracket during retirement, it might be better to stick with your traditional IRA.
Right now, federal income tax rates are relatively low. Some experts predict that rates will eventually rise, potentially making current conversion tax costs seem like a bargain in retrospect.
2. Where Will the Money Come From to Pay the Conversion Tax?
When you convert, you’ll owe income tax on the amount converted in the year of conversion. A big mistake some folks make is using IRA funds to pay this tax. DON’T DO THAT!
If you use IRA funds to pay the tax:
- Those funds won’t grow tax-free in your Roth IRA
- If you’re under 59½, you might face an additional 10% federal penalty
- You’ll pay even more tax because the withdrawal to pay taxes is itself taxable
Ideally, you should have non-retirement funds available to pay the tax bill. This maximizes the amount transferred to the Roth IRA, where it can grow tax-free.
3. The Five-Year Rule and Access to Your Money
Roth IRAs offer more flexibility for withdrawals than traditional IRAs, but there are still rules to follow:
- You can withdraw your contributions from a Roth IRA at any time without taxes or penalties.
- To withdraw earnings tax-free, you must be at least 59½ AND have had the Roth IRA for at least five years.
This “five-year clock” starts on January 1 of the year you made your first Roth contribution or conversion. So if you need access to the earnings soon, a conversion might not be ideal.
4. Required Minimum Distributions (RMDs)
With traditional IRAs, you must start taking required minimum distributions (RMDs) once you reach a certain age (currently 73 if you reached age 72 in 2023 or later). These RMDs are taxable and force you to withdraw money whether you need it or not.
One of the biggest advantages of Roth IRAs? No RMDs during your lifetime! This means:
- Your money can continue to grow tax-free for as long as you live
- You have more control over your taxable income in retirement
- You can leave more to your heirs if you don’t need all the funds
For many retirees who don’t need the money for living expenses, this RMD freedom alone is worth considering a conversion.
5. Estate Planning Considerations
If leaving money to your heirs is important to you, a Roth IRA can be an attractive option. Here’s why:
- Beneficiaries who inherit your Roth IRA won’t have to pay income taxes on the distributions they take (assuming the account meets the five-year rule).
- While non-spouse beneficiaries still need to empty the account within 10 years under current rules, they can take tax-free distributions.
Compare this with inheriting a traditional IRA, where your beneficiaries will have to pay income taxes on every distribution they take. Plus, if they’re in their peak earning years, those distributions could push them into even higher tax brackets.
6. Medicare Premium Impacts
Here’s something many people overlook: a large conversion could temporarily increase your Medicare premiums.
Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine your premiums. For example, your 2023 MAGI affects your 2025 premiums.
If your MAGI exceeds certain thresholds ($106,000 for single filers or $212,000 for joint filers in 2023), you’ll pay higher premiums for Medicare Parts B and D. These surcharges increase with income.
This doesn’t mean you shouldn’t convert, but you might want to plan a series of smaller conversions over several years to minimize this impact.
7. Current Value of Your IRA Investments
The market timing of your conversion can significantly affect its value. Converting when your IRA investments are temporarily depressed in value means you’ll pay less in taxes now, and then enjoy tax-free growth when they recover.
For example, during market downturns, some investors strategically accelerate Roth conversions to take advantage of temporarily lower values and tax costs.
8. Partial Conversions Over Time
You don’t have to convert your entire traditional IRA at once. In fact, many financial advisors recommend a series of partial conversions spread over several years. This approach can:
- Prevent you from jumping into a higher tax bracket in a single year
- Give you flexibility to adjust your strategy based on changing tax laws
- Allow you to be strategic about which assets to convert first
We often recommend converting just enough each year to “fill up” your current tax bracket without spilling over into the next one.
9. No Do-Overs: Conversions Are Permanent
Prior to 2018, if you converted to a Roth and then regretted it (perhaps because the investments declined in value shortly after), you could undo the conversion through a process called “recharacterization.”
That option is gone. Under current tax law, Roth conversions are permanent. Once you convert, you’re stuck with the tax bill, even if your investments tank the next day.
This makes it even more important to carefully consider the timing and amount of any conversion you’re planning.
Real-World Example: When a Conversion Makes Sense
Let me share a quick example from my practice. I had a client, let’s call her Sarah, who was 58 and planning to retire at 65. She had accumulated a substantial traditional IRA but expected her income (and tax bracket) to actually increase in retirement due to other investments that would mature.
We analyzed her situation and recommended a series of partial conversions over seven years, timed to keep her in the 24% federal tax bracket each year. By the time she retired, she had moved most of her IRA assets to a Roth. Now at 70, she’s taking tax-free withdrawals while her friends are fretting about RMDs and tax planning.
The conversion strategy saved her an estimated $175,000 in lifetime taxes. Not every case works out this well, but it illustrates the potential benefits.
Who Should Definitely NOT Convert to a Roth IRA?
While Roth conversions offer many advantages, they aren’t for everyone. You probably should NOT convert if:
- You’re nearing retirement and need your traditional IRA to cover living expenses soon.
- You expect to be in a significantly lower tax bracket in retirement.
- You’re currently receiving Social Security or Medicare benefits, and a conversion would increase your taxable income enough to trigger higher Medicare premiums or more taxes on your Social Security benefits.
- You don’t have non-IRA funds available to pay the conversion tax.
- You plan on giving a substantial amount of your IRA to charity through Qualified Charitable Distributions (QCDs), which allow you to satisfy RMDs without creating taxable income.
The Mechanics: How to Convert
If you’ve decided a Roth conversion makes sense, the process is relatively straightforward:
- Determine how much you want to convert.
- Contact your IRA custodian (the financial institution where your traditional IRA is held).
- Complete the appropriate conversion form.
- Request 0% withholding (remember, you want to pay the taxes separately).
- Ensure you have funds set aside to pay the resulting tax bill.
Most major financial institutions make this process simple, and some even allow you to complete the conversion online.
Final Thoughts: A Strategy, Not Just a Transaction
Converting from a traditional IRA to a Roth IRA isn’t just a one-time decision or transaction. It’s part of a broader retirement and tax strategy that should evolve with your changing financial situation and goals.
I always tell my clients that tax diversification is often as important as investment diversification. Having some money in traditional accounts, some in Roth accounts, and some in taxable accounts gives you maximum flexibility in retirement.
We can’t predict future tax rates or laws with certainty, but we can make informed decisions based on current information and reasonable projections. The right conversion strategy might involve moving portions of your IRA over time or targeting specific investment assets for conversion.
Ultimately, the decision about whether to convert your IRA to a Roth should be made as part of your comprehensive financial plan, ideally in consultation with a qualified tax advisor or financial planner who understands your unique circumstances.
Remember, what works for your neighbor or coworker might not be right for you. Take the time to analyze your own situation carefully. Your future self will thank you for it!
Have you considered converting your traditional IRA to a Roth? What factors are most important in your decision? I’d love to hear your thoughts in the comments below!
Test Two: How does my current tax rate compare to my future tax rate?
In a perfect world, you would do a Roth conversion when your tax rate on the conversion will be less than when you withdraw those funds in retirement. One of the best times to convert IRA dollars to a Roth is during what we refer to as “the trough years” – the period after you’ve retired but before you collect Social Security benefits, or you’re subject to the required minimum distribution rules. During that time, you usually have complete control over the amount and source of income you generate, so managing the tax cost of a conversion can be much easier.
Its impossible to predict what tax rates are going be just a couple of years from now, let alone perhaps decades from now for those who convert at younger ages. So maybe rather than trying to predict tax rates, look at your income level. If you’re someone who is well advanced in their career, you might be at your peak earnings level right now. Adding conversion income on top of that might come at the highest tax cost you’ll ever experience. Instead of converting then, consider making the conversion after retirement, when your wages have gone away and you can begin taking advantage of the lower marginal tax brackets again.
As we said earlier about how you pay the tax, paying a higher tax cost today than you might in retirement doesn’t necessarily mean a Roth conversion is a bad strategy. It can make it a lot harder to justify the conversion, but once again – time can be your friend when it comes to making the best use of a Roth conversion.
Test One: How will I pay the upfront tax?
When you withdraw the funds from your IRA or 401k to do the conversion, you can certainly hold some of that amount back to cover the tax you’re going to owe on the conversion. Ideally, though, you would use savings from outside your IRA or 401k to pay that tax, allowing you to get as much as possible into the Roth and growing tax-free. This is especially true if you’re under age 59 ½ at the time of the conversion. Up until that age, any amount you withdraw from your IRA that doesn’t go to the Roth will be considered an early withdrawal and is likely to be subject to an extra 10% tax penalty.
Now, if you have to use IRA dollars to pay the tax on the conversion, it doesn’t necessarily mean a Roth conversion won’t be a good strategy. It just means it is going to take longer for the benefits of the Roth to become apparent, but as you’ll read later, time is often the best thing you have going for you with a Roth conversion.
Should I Convert My Retirement To Roth?
FAQ
Do you have to pay taxes on a Roth IRA conversion?
For that reason, you have to pay income taxes on the converted amount. Here’s how it works. Say you decide to convert $10,000 of pre-tax contributions from your traditional IRA to a Roth IRA. The $10,000 will be added to your gross income for the tax year. If your marginal tax rate is 22%, you’d owe up to $2,200 on the conversion.
Should I convert my traditional IRA to a Roth IRA?
If you have a significant balance in your traditional IRA, you may want to carry out multiple Roth IRA conversions over several years, which we call a systematic Roth conversion plan. If done properly, a multiyear approach could allow you to convert a large portion of your savings to a Roth IRA while limiting the tax impact.
How many Roth conversions can you make from a traditional IRA?
At present, there are essentially no limits on the number and size of Roth conversions you can make from a traditional IRA. According to the IRS, you can make only one rollover in any 12-month period from a traditional IRA to another traditional IRA.
Can a 401(k) be converted to a Roth IRA?
With a Roth IRA, you can invest after-tax money in a range of assets and withdraw the money tax-free after age 59 1/2. There are multiple benefits of having a Roth IRA: The actual process for converting a 401 (k) or traditional IRA to a Roth IRA is simple. When tax time rolls around, however, things can get more complicated.
What happens if you convert a Roth IRA?
The 2017 Tax Cuts and Jobs Act ended recharacterizations of Roth conversions. So if you do a Roth conversion, you are stuck with your original income tax bill, even in cases where your Roth IRA assets go down in value soon after the conversion. This first appeared in The Kiplinger Tax Letter.
Can a Roth IRA be converted over a year?
Alternatively, you may convert the account over a period of years to limit the tax bite in any single year. While a Roth IRA conversion may be atypical for some individuals, many others who earn too much for a typical Roth IRA perform a backdoor Roth IRA conversion each year.
At what age should you not convert to Roth IRA?
Who can convert a traditional IRA to a Roth IRA? There’s no age limit or income requirement to convert a traditional IRA to a Roth IRA. You must pay taxes on the amount converted, although part of the conversion will be tax-free if you have made nondeductible contributions to your traditional IRA.
When should I convert my IRA to a Roth?
How much tax will I pay if I convert my IRA to a Roth?
What is the break even point for a Roth conversion?