A Roth conversion is simple in concept: you move money from a pre-tax retirement account (a traditional IRA or old 401k) into a Roth IRA, pay income tax on the amount converted now, and then let that money grow tax-free.
Whether that trade is worth it comes down to one question: will your tax rate be higher now, or later?
Pre-Tax vs Roth: The Core Distinction
To understand conversions, you need to understand what you’re converting between.
Traditional (pre-tax) accounts: You contribute before paying income tax. The money grows tax-deferred. You pay income tax when you withdraw in retirement.
Roth accounts: You contribute after paying income tax. The money grows tax-free. Withdrawals in retirement are tax-free.
A conversion moves money from the first category to the second. You pay taxes on the converted amount as ordinary income in the year you convert. In exchange, that money, and all its future growth, is never taxed again. See Traditional IRA vs Roth IRA for a detailed look at the two account types.
The Tax Timing Argument
A conversion makes mathematical sense when your tax rate today is lower than your expected tax rate when you’d otherwise withdraw the money.
If you convert $20,000 at a 12% marginal tax rate, you pay $2,400 in taxes. If that $20,000 grows to $60,000 over 25 years, you pay nothing when you withdraw it. Without the conversion, you’d owe taxes on that $60,000 at whatever rate applies in retirement, which could be 22%, 24%, or higher.
The uncertainty cuts both ways. Tax rates could fall in the future. Your retirement income could be lower than you expect. A conversion is a bet on future rates, an informed one, but not a certainty.
When a Conversion Makes Sense
You are in a low-income year. Early career, between jobs, starting a business, taking time off, or otherwise earning significantly less than usual. Low income means a low marginal tax rate, which means the conversion is cheaper.
You have pre-tax retirement accounts from old employers. If you have money sitting in old 401(k) plans or traditional IRAs from previous jobs, especially accounts you’re not planning to touch for decades, a year when your income is low is an ideal time to convert some or all of it.
You expect your tax rate to be higher in retirement. If you have significant savings, rental income, Social Security, pensions, or required minimum distributions (RMDs) from large pre-tax accounts, your taxable income in retirement may be substantial, possibly higher than your current income. Converting now locks in today’s lower rate.
You want to reduce future required minimum distributions. Traditional IRAs and 401ks require you to start withdrawing money at a certain age (currently 73 for most people, though this can change, confirm at IRS.gov). These withdrawals are taxable income. A smaller pre-tax balance means smaller, lower-tax RMDs. Roth IRAs have no RMDs.
You want tax-free money available to heirs. Roth IRAs inherited by non-spouse beneficiaries must be distributed within ten years, but the distributions are tax-free. This can be a significant benefit for estate planning.
When a Conversion Probably Does Not Make Sense
Your tax rate will clearly be lower in retirement. If you’re in a high-income year and expect much lower income in retirement, paying taxes now at the higher rate to avoid taxes later at the lower rate works against you.
You can’t pay the tax bill without using the converted money itself. Pay the tax owed from outside the converted account, ideally from regular savings or income. Using part of the converted amount to cover the tax is almost always wrong: it triggers early withdrawal penalties if you’re under 59½ and shrinks the compounding base inside the Roth.
You need the money in the next few years. Roth IRA earnings need the account to be at least five years old for tax-free withdrawal. Each conversion has its own five-year clock. If you might need this money soon, a conversion can limit your access.
Your pre-tax accounts are small and your expected retirement income is low. If you expect modest retirement income, your RMDs may stay in a low tax bracket anyway. The benefit of converting shrinks when the future taxes you’re avoiding are small.
How To Actually Do a Conversion
- Open a Roth IRA if you don’t already have one, at any major brokerage.
- Contact the institution holding your traditional IRA or old 401k. Request a direct rollover (sometimes called a trustee-to-trustee transfer) to your Roth IRA. Don’t take the money as a check, if you do, you must deposit it within 60 days or it counts as a taxable distribution plus a possible early withdrawal penalty.
- Decide how much to convert. Converting partial amounts over several years is a common strategy (called a “Roth conversion ladder”) to stay within a given tax bracket.
- Pay the taxes. The converted amount is added to your income for the year. Your brokerage will send you a 1099-R showing the taxable amount. Pay any additional tax owed by April 15, or via quarterly estimated taxes if the amount is large.
What You Owe in Taxes the Year You Convert
The converted amount is treated as ordinary income in the year you convert. It’s added to your other income and taxed at your marginal rate.
Example: You have $50,000 in regular income and convert $15,000 from a traditional IRA. Your taxable income for the year is $65,000. The converted $15,000 is taxed at whatever rate applies to that slice of income. A large conversion can push part of your income into a higher bracket than you planned.
Conversions can also:
- Increase Medicare premiums (IRMAA surcharges) if your income exceeds certain thresholds
- Affect eligibility for income-tested programs or credits
For anything beyond a simple, modest conversion, run the numbers with a CPA or tax professional. The cost of a consultation is worth it when the stakes are this real.
The Backdoor Roth Conversion
Roth IRA contributions have income limits, above a certain income (check IRS.gov for the current year’s thresholds, which adjust for inflation), you can’t contribute directly to a Roth IRA.
The backdoor Roth is a workaround:
- Contribute to a traditional IRA (no income limits for contributions, though you may not get a deduction at higher incomes)
- Then convert that traditional IRA contribution to a Roth IRA
This lets high earners make Roth IRA contributions indirectly. The IRS is aware of the strategy and hasn’t prohibited it.
One complication, the pro-rata rule: If you have other traditional IRA balances anywhere (including SEP-IRA or SIMPLE IRA), the IRS calculates the tax on your conversion proportionally across all your traditional IRA money, not just what you just contributed. This can make the backdoor Roth messier than it looks. If you have significant pre-tax IRA balances, talk to a tax professional before trying this.
For high earners with no existing traditional IRA balances, the backdoor Roth is a clean and well-established strategy.
Frequently Asked Questions
Q: Can I convert my 401(k) directly to a Roth IRA?
Yes, if your 401(k) plan allows it. This is called a rollover. You may first need to roll the 401(k) to a traditional IRA, and then convert that to a Roth. Rules vary by plan. Contact your plan administrator.
Q: Is there a limit on how much I can convert?
No annual limit. You can convert any amount from a traditional IRA or 401(k) to a Roth in a given year. The only limit is the tax you’re willing to pay, large conversions push more income into higher brackets.
Q: Can I undo a Roth conversion if I change my mind?
No, as of 2018. Congress eliminated the ability to “recharacterize” (reverse) a Roth conversion. Once converted, the taxes are owed for that year, this makes the decision more final than it used to be, plan carefully before converting a large amount.
Q: What is a Roth conversion ladder?
A strategy where you convert small amounts each year, enough to fill up a lower tax bracket but not push you into a higher one, over several years. Rather than converting a large balance in one year and paying a high marginal rate, you spread the taxable income across multiple lower-rate years. This requires planning but is often the most tax-efficient approach for large pre-tax balances.
Q: Do conversions affect Social Security taxes?
Yes, potentially. If your combined income (including the conversion) exceeds IRS thresholds, more of your Social Security benefits may become taxable. Check the IRS rules on Social Security taxation or consult a tax professional if Social Security is part of your income picture.