A Roth conversion is one of the most talked-about tax planning strategies for retirement – but is it the right move for you? It can be a powerful tool, but it’s not for everyone.
Understanding when and why it makes sense can help you make a more informed decision about your financial future.
Key Takeaways
- A Roth conversion allows you to move pre-tax retirement savings into a Roth IRA, where your money can grow tax-free and be withdrawn tax-free in retirement.
- It can be a smart move if you expect to be in a higher tax bracket later, have lower-than-usual income this year, or want to leave tax-free money to heirs.
- Before converting, consider the immediate tax impact, the five-year rule for withdrawals, and how it affects Social Security and Medicare.
Benefits of a Roth IRA
A Roth IRA is a tax-free income machine for retirement. Here’s why it’s so attractive:
- After-tax contributions: You pay taxes upfront when contributing (or converting), so you don’t get an immediate tax deduction.
- Tax-free growth: Your investments grow without capital gains taxes or annual tax reporting.
- Tax-free withdrawals: Once you reach age 59 ½ and meet the five-year rule, all distributions are tax-free.
- No Required Minimum Distributions (RMDs): Unlike traditional IRAs, you’re not forced to withdraw money at age 73.
- Tax-free inheritance: Heirs can receive your Roth IRA money tax-free, making it a valuable estate planning tool.
How a Roth conversion works
A Roth conversion means transferring money from a tax-deferred retirement account (like a traditional IRA or 401(k)) into a Roth IRA. The catch? You’ll owe taxes on the converted amount at your current income tax rate.
However, once your money is in a Roth IRA, it grows tax-free, and qualified withdrawals are tax-free.
When does a Roth conversion make sense?
A Roth conversion can be a great move in the right circumstances. Here are some scenarios where it might be worth considering:
- You expect higher taxes in the future. If you think tax rates will rise or you’ll be in a higher bracket in retirement, it may be smart to pay taxes now at a lower rate.
- You want tax diversification. Having a mix of taxable, tax-deferred and tax-free accounts gives you flexibility in retirement.
- You have lower-than-usual income this year. If your income is down – perhaps due to a job transition or early retirement – it may be an ideal time to convert at a lower tax rate.
- Estate planning advantages. A Roth IRA lets you leave tax-free money to heirs, which can be especially valuable if you expect to leave a sizable inheritance.
What should you consider before converting?
While a Roth conversion has advantages, there are important factors to weigh:
- Immediate tax impact. The amount you convert is taxed as income, which could push you into a higher tax bracket.
- Can you afford the tax bill? Ideally, you should pay the conversion taxes with non-retirement funds to avoid dipping into your savings. The amount of tax will depend on your income tax bracket and income tax rate – between 10% and 37% for 2025.
- The five-year rule. Withdrawals of converted funds are tax-free only if they’ve been in the Roth IRA for at least five years. So, if you need the funds immediately, then a Roth conversion is probably not a good move.
- Impact on Social Security & Medicare. A large conversion could temporarily increase your taxable income, potentially triggering higher Medicare premiums or making more of your Social Security taxable.
- Loss of tax deductions or credits. Higher taxable income from the conversion could reduce eligibility for certain tax credits and deductions.
- Timing and strategy. Some retirees spread conversions over multiple years to stay in lower tax brackets rather than converting a large sum all at once.
Should you do a Roth conversion?
Here are some key questions to ask yourself:
- Will my tax rate be higher in the future?
- Do I have the cash to pay the taxes without dipping into my savings?
- How long do I plan to keep the money invested?
- Am I comfortable with potentially higher Medicare premiums or reduced tax credits in the short term?
- Do I want to leave a tax-free inheritance for my heirs?
Bottom line
A Roth conversion can be a smart strategy, but it’s not a one-size-fits-all decision. The best approach depends on your income, tax situation, retirement goals and estate plan.
If you’re considering a conversion, it’s wise to consult with a financial advisor to create a tax-efficient strategy that fits your needs.
Want to explore whether a Roth conversion makes sense for you? Schedule a consultation today to review your options and create a personalized retirement plan.
