Roth Conversions: When They Make Sense

A Roth conversion means voluntarily paying tax on traditional retirement money now so it can grow tax-free forever. Done in the right year it is one of the most powerful tax moves available; done carelessly it just hands the IRS money early.

What a conversion is

You move some or all of a traditional IRA or 401(k) into a Roth account. The converted amount is added to your taxable income for that year, so you pay income tax on it now. In exchange, all future growth and withdrawals from the Roth are tax-free, and Roths have no required minimum distributions.

The core idea: tax-rate arbitrage

A conversion wins when your tax rate today is lower than the rate you expect in retirement. You are choosing to pay tax at the lower rate. So the best candidates are people in a temporary low-income window.

Prime windows to convert

The classic opportunity is the gap years between retiring and starting Social Security or required distributions, when income (and tax rates) dip. Other good windows include a year with low earnings, a market downturn (you convert more shares for the same tax bill), or before tax rates are scheduled to rise.

Fill the bracket, don't overflow it

The smart approach is to convert just enough to "fill up" your current tax bracket without spilling into the next one. Converting a huge amount in one year can push you into higher brackets and raise Medicare premiums (IRMAA), wiping out the benefit. Spreading conversions over several years usually works best.

Pay the tax from outside the account

Ideally pay the conversion tax with money from a regular taxable account, not from the IRA itself. If you use IRA funds to pay the tax, you shrink the amount that gets to grow tax-free and may owe penalties if you are under 59 and a half.

Model a conversion's tax cost with our Roth conversion calculator and check your bracket with the tax bracket calculator.