Roth Conversions: What They Are and When They Make Sense

If you’ve ever wondered whether it makes sense to pay taxes now to potentially avoid them later, you’re already thinking along the same lines as a Roth conversion. It’s one of the most talked-about strategies in retirement planning, and for good reason. Done thoughtfully, a Roth conversion can reduce your long-term tax bill, create more flexibility in retirement, and even leave a tax-free legacy for your heirs.

But like all powerful planning tools, it’s not a one-size-fits-all solution. Let’s break down what a Roth conversion is, when it might be a good idea, and the key factors to consider before making the move.

What Is a Roth Conversion?

A Roth conversion is the process of moving money from a traditional pre-tax retirement account, like a Traditional IRA, SEP IRA, or a pre-tax 401(k), into a Roth IRA. The catch is that any pre-tax dollars you convert will be taxable in the year of the conversion.

Why would anyone voluntarily pay taxes sooner than necessary? Because Roth IRAs come with some powerful advantages:

- Tax-free growth and withdrawals: Once in a Roth IRA, your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free.

- No required minimum distributions (RMDs): Unlike traditional IRAs, you’re not forced to take taxable withdrawals starting at age 73.

- Estate planning perks: Beneficiaries inherit Roth IRAs income-tax free, which can make them a valuable wealth-transfer tool.

In short: You pay taxes on the seed, but the harvest is tax-free.

When a Roth Conversion Might Be a Good Idea

The general rule of thumb is this: a Roth conversion makes sense when your current tax rate is lower than the tax rate you expect in the future. That can happen in several scenarios:

1. You Expect Higher Taxes in Retirement: If you’re in a relatively low tax bracket today but expect to be in a higher bracket in retirement (maybe because of future RMDs, Social Security, pensions, or investment income) a Roth conversion can help you “lock in” today’s lower rate.
2. You Have a Low-Income Year: Sometimes income dips for reasons outside your control (a job change, business loss, or even a gap year between retirement and the start of Social Security or pensions). These windows can be ideal times to convert assets at a lower tax cost.
3. You’re Worried About Rising Tax Rates: The federal tax code is written in pencil, not stone. A Roth conversion can be a way to hedge against the risk of higher future rates.
4. You Want to Reduce Future RMDs: Large balances in traditional retirement accounts can create substantial RMDs and corresponding tax bills later in life. Converting some of that balance today can shrink those future RMDs and give you more control over your taxable income in retirement.
5. You’re Planning for Heirs: If leaving money to children or grandchildren is important, Roth accounts can be particularly appealing. Beneficiaries can take tax-free withdrawals, which means you’ve essentially pre-paid the taxes at your own rate instead of leaving them a taxable account.

When a Roth Conversion Might Not Be a Good Idea

Of course, conversions aren’t always the smart play. Here are some red flags:

- You don’t have cash to pay the taxes. Using retirement funds themselves to pay conversion taxes defeats much of the purpose. Ideally, you should pay the tax bill with money from outside your retirement accounts.

- You’re in your peak earning years. Converting while you’re in the highest bracket of your career often means paying more tax than necessary. It may be smarter to wait for a lower-income period.

- You’ll need the money soon. Roth IRAs have a five-year rule: to take tax-free withdrawals, the account must be open at least five years (and you must be 59½ or older). If you’ll need those funds in the near term, converting may not make sense.

- You’re close to Medicare or Social Security thresholds. Conversions increase your taxable income, which can raise your Medicare premiums or cause more of your Social Security benefits to be taxed. Careful timing is key.

How Much Should You Convert?

Roth conversions don’t have to be all-or-nothing. Many people convert in stages, year by year, to manage tax brackets. For example, you might “fill up” the 22% or 24% bracket without pushing yourself into a higher one.

This approach smooths out your tax liability and creates a balance of tax-deferred and tax-free money, giving you flexibility to pull from whichever bucket makes the most sense in retirement.

Strategic Considerations

Before you rush to convert, think through these key planning points:

1. Tax Brackets: Run the numbers to see where a conversion would push your taxable income. Sometimes converting just a portion keeps you in a favorable bracket.
2. Timing: Low-income years, market downturns, and before age 73 (when RMDs begin) are often prime opportunities.
3. Legislation: Be mindful of the scheduled tax law changes in 2026. Acting before then could mean paying lower rates.
4. State Taxes: Don’t forget your state’s income tax. Some states don’t tax retirement income, which may tilt the math in one direction or another.
5. Long-Term Goals: Consider whether your priority is minimizing lifetime taxes, leaving more to heirs, or simply maximizing flexibility.
   
   

Putting It All Together

A Roth conversion isn’t a magic bullet, but it can be a powerful lever in your retirement strategy. The decision comes down to a trade-off: pay taxes now, or pay them later (and potentially at a higher rate).

For some, it’s a no-brainer; for others, the math doesn’t work out. Most people fall somewhere in the middle, where partial, carefully timed conversions can significantly reduce lifetime taxes and provide peace of mind.

Final Word

Think of a Roth conversion as moving money into a tax-free “forever home.” It takes some effort and planning, but once it’s there, you’re free from future tax worries.

The key is to make the move strategically. When the tax math works in your favor, when it won’t disrupt other financial priorities, and when it aligns with your long-term goals.

Before you convert, work with your Allworth financial advisor and tax professional to run the numbers. What looks like a savvy move in one scenario could backfire in another. Like all financial strategies, context is everything.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.