What Is a Roth Conversion? (When It Makes Sense and When It Doesn't)

A Roth conversion moves money from a traditional IRA or 401(k) — where contributions were pre-tax — into a Roth IRA, where future growth and withdrawals are tax-free. The catch: you pay income tax on the converted amount in the year you convert. The bet is that paying taxes now saves more than paying taxes later.

Why People Do Roth Conversions

Traditional retirement accounts defer taxes — you pay when you withdraw in retirement. But if your tax rate will be higher in retirement than it is now, you'd pay more total tax by waiting. A Roth conversion locks in today's lower tax rate.

Common situations where conversion makes sense:

• You're in a low-income year: job change, career break, early retirement, or sabbatical
• Early in your career when income — and your tax bracket — is lower than it will be later
• You expect significantly higher income or tax rates in retirement
• You have a large traditional IRA and want to reduce future Required Minimum Distributions (RMDs)

How Roth Conversions Are Taxed

The converted amount is added to your ordinary income for the year. If you convert $20,000 and normally earn $60,000, you'll pay tax as if you earned $80,000. This can push you into a higher bracket — most advisors recommend converting only up to the top of your current bracket, not beyond it.

RMDs and Why Large IRAs Often Need Conversion

Starting at age 73, the IRS requires minimum withdrawals from traditional IRAs each year — and you pay taxes on every dollar. Roth IRAs have no RMDs during the owner's lifetime. If you have a large traditional IRA, converting before age 73 reduces forced withdrawals and gives heirs a tax-free inheritance.

How to Do a Roth Conversion

1. 1Have both a traditional IRA and a Roth IRA (open one if needed)
2. 2Contact your brokerage and request a conversion, specifying the amount
3. 3Pay the taxes from outside funds if possible — using conversion money to pay taxes reduces the amount working for you
4. 4Report the conversion on your tax return using Form 8606

When NOT to Do a Roth Conversion

• You're in a high tax bracket now and expect lower income in retirement
• You'd have to sell investments at a loss or use converted money to pay the tax bill
• You're close to retirement with little time for the Roth to recover the tax cost
• The conversion would trigger higher ACA health insurance premiums if you're on a marketplace plan

The Roth Conversion Ladder (for Early Retirees)

A conversion ladder is a strategy for early retirees to access retirement funds before age 59.5 without the 10% penalty. By converting a fixed amount each year starting 5 years before you need it, each batch becomes available penalty-free after a 5-year holding period. This is how FIRE (Financial Independence) practitioners bridge the gap before traditional retirement accounts open up.