Roth Conversions: When They Make Sense

A Roth conversion moves money from a traditional (pre-tax) retirement account into a Roth account. You pay income tax on the amount now. In return, the money grows and can be taken out tax-free later, if you follow the rules.

How it works

You can convert from a traditional IRA, and many employer plans allow an in-plan conversion or a rollover to a Roth IRA. The converted amount is added to your income for the year and taxed at your rates. There is no income limit for doing a conversion.

The core idea

Converting is a bet on tax rates: you pay tax now so you do not pay tax later.

If your tax rate now is lower than it will be in retirement, converting tends to help.
If your tax rate now is higher, converting tends to hurt.
If it is the same, converting changes little on its own. Other benefits, such as no required withdrawals, may still matter.

Our Roth conversion calculator compares both paths for your brackets.

When converting often makes sense

You have a low-income year, for example between jobs, early in retirement or before Social Security and required withdrawals begin.
You expect higher tax rates later, because of your income or because rates rise.
You want money that is not subject to required withdrawals, or you want to leave tax-free money to heirs.
You can pay the conversion tax from other savings, so the whole converted amount keeps growing.

When to be careful

A bigger bill than you expect. A large conversion can push you into a higher bracket. Many people convert in smaller amounts over several years to stay in a bracket.
Other effects. The extra income can raise Medicare premiums, which look back at your income from two years earlier, and can make more of your Social Security benefit taxable.
You cannot undo it. Since 2018 a conversion cannot be reversed.
You need the tax money. If paying the tax means selling investments or taking from the converted amount, the benefit shrinks.

The 5-year rule

Roth accounts have timing rules. In general, to take earnings out tax-free you must be 59½ or older and have had a Roth account for at least 5 years. Separately, each conversion has its own 5-year clock for avoiding the 10% penalty on the converted amount if you take it out before 59½.

The pro-rata rule

If you have both pre-tax and after-tax money in your traditional IRAs, a conversion is taxed on a proportional mix of the two, not just the after-tax part. Check this before converting from an IRA that has after-tax contributions.

A simple way to start

Estimate your taxable income for the year without the conversion.
See how much room you have left in your current tax bracket.
Convert up to that amount, and set aside the money for the tax.
Repeat each year if it still makes sense.

A tax professional can check the details for your situation, especially for larger conversions.

If you are weighing Roth against traditional contributions, read our guide to Roth vs traditional 401k.

Try it yourself Roth conversion calculator Compare converting with staying traditional, using your own tax brackets. Open the calculator →

Sources

This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.