What is a Roth Conversion?
A Roth Conversion is moving money from a Traditional IRA or 401(k) to a Roth IRA. You pay income tax on the converted amount now, but all future growth and withdrawals are tax-free.
It's essentially "prepaying" your tax at today's rate to avoid tax at tomorrow's rate.
When Does Conversion Make Sense?
- You expect to be in a higher tax bracket in retirement
- You're in a temporarily low-income year (job change, sabbatical, early retirement)
- You want to reduce future RMDs
- You want to leave tax-free money to heirs
- You have a long time horizon for tax-free growth
- You can pay the tax from outside funds (not the IRA)
The Key Question
Bracket-Filling Strategy
Instead of converting all at once, convert just enough each year to "fill" your current tax bracket without pushing into a higher one.
| Bracket | Income Range (Single) | Strategy |
|---|---|---|
| 12% | $12,400 - $50,400 | Great conversion opportunity |
| 22% | $50,400 - $105,700 | Good if retirement rate is 24%+ |
| 24% | $105,700 - $201,775 | Convert if expecting 32%+ later |
| 32%+ | Above $201,775 | Usually wait unless special circumstances |
Multi-Year Conversions
Pay Tax from Outside Funds
Always try to pay the conversion tax from money outside your IRA:
- Maximizes the amount that gets Roth treatment
- Avoids potential 10% early withdrawal penalty (if under 59½)
- More of your money grows tax-free
Early Withdrawal Penalty
The Pro-Rata Rule
If you have both pre-tax and after-tax money in Traditional IRAs, you cannot selectively convert just the after-tax portion. The IRS treats all your IRAs as one pool.
Example: If 80% of your IRA is pre-tax and 20% is after-tax, 80% of any conversion is taxable.
Avoid Pro-Rata
Roth Conversion Ladder
For early retirees, a Roth Conversion Ladder allows tax-efficient access to retirement funds before 59½:
- Convert Traditional → Roth each year (pay tax at low rate)
- Wait 5 years for each conversion to become penalty-free
- Withdraw the converted principal tax-free and penalty-free
- Live off these withdrawals while waiting for next tranche
Impact on Other Factors
| Factor | Impact of Conversion |
|---|---|
| Medicare Premiums (IRMAA) | Higher income from conversion can increase premiums for 2 years |
| Social Security Taxation | Conversion income can make more SS benefits taxable |
| ACA Subsidies | Conversion income reduces or eliminates premium subsidies |
| Financial Aid | Conversion income affects FAFSA for 2 years |
Timing Matters
Frequently Asked Questions
Q: Can I undo a Roth conversion?
A: No, as of 2018, Roth conversion recharacterizations are no longer allowed. Conversions are permanent.
Q: Is there a limit on how much I can convert?
A: No limit! You can convert any amount. The limit is usually what tax bill you can afford.
Q: When is the best time to convert?
A: Low-income years: early retirement, job transition, sabbatical, or years with large deductions. Also before RMDs start (age 73/75).
Q: What about state taxes?
A: Most states tax conversions like federal. A few (like Florida, Texas) have no income tax — great for conversions!
Q: Should I convert if I'm retired?
A: Often yes! The years between retirement and RMDs (age 73/75) are prime conversion years when income is typically lower.
Q: How do I actually do a conversion?
A: Contact your brokerage. Most allow online conversions. Transfer from Traditional IRA to Roth IRA at the same institution is easiest.
Conversion Checklist
- Calculate your current marginal tax bracket
- Estimate your retirement tax bracket
- Identify how much you can convert without jumping brackets
- Ensure you can pay tax from outside funds
- Check impact on Medicare, ACA, financial aid
- Execute conversion before year-end
- Set aside estimated tax payment
- Report on Form 8606 with tax return
Roth conversion analysis involves many personal factors. This calculator provides estimates based on simplified assumptions. Consult a tax professional for personalized advice, especially regarding state taxes and timing.