Is Now the Right Time for a Roth Conversion?

A Roth conversion moves money from a traditional IRA to a Roth IRA. You pay income tax on it now, and in exchange, future qualified withdrawals can be tax-free. Whether that trade makes sense depends on you.

Key takeaways

• You pay tax in the year you convert, not later
• The goal is usually to pay at a lower rate now than you might pay later
• A conversion adds to your income for the year, which can affect other costs
• Roth IRAs do not require withdrawals for the original owner

The basic idea

Money in a traditional IRA has not been taxed yet. When you take it out, it counts as income. Money in a Roth IRA was taxed already. When you take it out later, qualified withdrawals are not taxed.

A conversion lets you choose when to pay the tax. Some people prefer to pay it in a year when their income is lower.

Why timing matters

The tax is based on your bracket in the year you convert. Many people look at conversions in years like these:

• Early retirement, before Social Security and required withdrawals begin
• A year with lower income or a large deduction
• A year when markets are down, since the same number of shares moves at a lower value

None of these is a rule. Market drops can reverse, and tax rates can change. Future tax rates are not known.

What to weigh

A conversion has costs, not only benefits.

1. The tax bill. Ideally you can pay it from money outside the IRA. Paying it from the IRA itself means less money left to grow.
2. Your other income. A conversion counts as income. It may push you into a higher bracket. It may also raise your Medicare premiums or make more of your Social Security taxable.
3. The five-year rules. Special waiting periods can apply to converted money. Ask your advisor how they affect you.
4. Your plans for the money. A Roth may also help heirs, who may be able to take withdrawals tax-free. Rules for inherited accounts are different from the owner's.

A conversion can often be done in pieces. Many people convert a little each year rather than all at once.

• Estimate your income for this year and the next few
• Find out how much tax a conversion would add
• Check whether you can pay the tax from outside the IRA
• Ask how a conversion affects Medicare and Social Security

Sources and references

• IRS: Roth IRAs (opens in a new tab)
• IRS: Rollovers of retirement plan and IRA distributions (opens in a new tab)

This article is general information, not tax or investment advice for your situation. Tax rules change; talk with a qualified professional before acting.