When Should You Consider Doing A Roth Conversion? 

When Should You Consider Doing A Roth Conversion? 

With year-end quickly approaching, it’s important to start thinking about tax planning opportunities that need to be completed before the year wraps up. One of the most valuable strategies available to many investors is the Roth conversion. But what exactly is a Roth conversion and when does it make sense to do one?

A Roth conversion, simply put, involves taking funds from a traditional IRA and converting them into a Roth IRA. Since you haven’t yet paid taxes on your traditional IRA, you’ll owe taxes when you make the conversion. This is because a traditional IRA is a pre-tax, tax-deferred vehicle – meaning you pay taxes when you withdraw the funds. In contrast, a Roth IRA is a tax-free vehicle, so you pay the taxes upfront, allowing the Roth to grow and remain tax-free forever. The biggest benefit of getting funds into a Roth IRA is the tax-free growth you enjoy on gains from qualified distributions.

This sounds great so everyone should be doing these Roth conversions then, right?

Not exactly. Roth conversions are a powerful strategy, but they don’t make sense for everyone. There are several important factors to consider before deciding if it’s right for you. Let’s break down some key points to think about before committing to a Roth conversion strategy.

1. You are in a lower tax bracket now and expect to be in a higher tax bracket in retirement 

Looking ahead to what your retirement cash flow will look like is an important part of any tax planning strategy. Some individuals are in a lower tax bracket now than they will be in retirement due to income sources such as pensions, Social Security, real estate, and IRA distributions. It’s important to understand your current tax situation and estimate your expected retirement cash flow. If you find that you’re in a lower tax bracket now compared to what you anticipate in retirement, it may make sense to begin tax planning and consider converting some of your pre-tax dollars to a Roth sooner rather than later.

2. You want to leave a tax -free inheritance 

Legacy is very important to some individuals and a lot of times, they don’t want to leave behind inheritance with strings attached. You may be wondering, what strings could I be attaching to the inheritance money I plan to leave behind? If you leave your heirs a pre-tax IRA, with the new Secure Act law that went into effect January 1, 2020, your heirs now have 10 years from inheriting that IRA to deplete those funds from the IRA account. That means they must withdraw all the funds sitting in the inherited IRA within a 10 year window, deplete the account and whatever they withdraw, will increase their taxable income for the year forcing them to pay additional taxes. The strings we were referring to, are the taxes heirs will pay by leaving them traditional IRA funds. By doing Roth conversions, if your heirs inherit Roth funds, they will still have to liquidate the Roth in 10 years but in most cases they will pay no taxes on the withdrawals.

3. You have large pre-tax retirement account(s) 

As you get closer to retirement, consider looking at your pre-tax IRA account balances. Have you been contributing to your 401(k) for 20+ years and enjoying the tax deduction you’ve received each year? Well, so has Uncle Sam. He has been wanting to give you that tax write off every year because he knows that in retirement, when your nest egg has grown tax-deferred, he will then start collecting on all those tax years he didn’t receive a penny for those funds. You may be thinking, “In retirement, I can control how much I take from my IRA account each year”. But starting at a certain age, you will be required to take funds from your traditional IRAs and the government gets to decide how much you must take each year. These are called Required Minimum Distributions (RMDs).

The good news? Roth IRAs don’t have RMD requirements. By completing Roth conversions before you reach your RMD age, you can reduce  the impact of what you will be forced to withdraw later –  which gives you more control over what’s rightfully yours.

4. You can pay conversion tax with non-retirement dollars 

If you are considering doing a Roth conversion, you must consider how you are going to pay the taxes for the conversion amount. The year you convert the IRA funds to Roth, is the year when the taxes are due. If you are under 59 ½, and you withhold a percentage for taxes, you will receive a 10% penalty on the amount you withheld for taxes because it’s a distribution from the account. Most of the time, you want to pay for Roth conversion taxes with outside dollars even if you are over 59 ½. This is because you do not want to dwindle your retirement savings down just to pay the taxes and get the funds into a Roth. Having outside non-retirement funds to pay for the conversion is usually going to be the best option for clients of all ages.

5. You believe tax rates will be higher in the future 

With the passing of the One Big Beautiful Bill Act (OBBBA), we now have some guidance on tax policy for the next few years. OBBBA, made Tax Cut and Jobs Act (TJCA) tax brackets now permanent or until they are changed by a new law. TCJA brought us lower tax brackets which are some of the most favorable tax rates in history. This gives a good argument that taxes will be higher in the future given the lower rates we currently have under OBBBA. You can hedge your bets by doing conversions now while we have lower tax brackets in case tax rates go up.

6. You have room in your current tax bracket 

In retirement, bracket creep can become more common due to the compounding growth of pre-tax accounts. Bracket creep occurs when taxable income gradually increases over time, pushing you into a higher tax bracket. You can help prevent this in retirement by fully utilizing your current tax bracket – converting some of your pre-tax funds to a Roth while staying within that same bracket.

For example, in 2025, the 22% tax bracket for married couples filing jointly covers taxable income from $96,950 to $206,700. If your household taxable income is $160,000, you could convert up to roughly $46,700 from your IRA to a Roth IRA without moving into the next bracket. By taking advantage of this strategy now, you can reduce future pre-tax balances and potentially avoid creeping into higher brackets in retirement.

7. You expect lower income years in early retirement 

Some individuals have lower income the first few years of retirement. This could be from after-tax dollars or brokerage account(s) that can be used to spend down in the early years of retirement which can allow individuals to stay in lower tax brackets. Taxable income may be low early on and rise with the use of pre-tax IRA funds or when RMDs kick in. With the lower income years, this could be a great time to look at a Roth conversion strategy since income is expected to rise at some point.

Partnering with an advisor to help maximize a Roth conversion strategy can be powerful when done correctly and in the right situations. Making sure you are aware of the considerations is important so you don’t get caught paying unnecessary taxes.

By: Shannon Stophel

Published on 10/27/25