When Does a Roth Conversion Make Sense?

A Roth conversion makes sense when your tax rate today is lower than the rate you expect to pay later, you can pay the conversion tax from non-retirement money, and you will not need the converted funds for at least five years. The gap years between retirement and required distributions are often the best window. A financial advisor in Signal Mountain, TN can size conversions year by year.

How a Roth Conversion Works

You move money from a traditional IRA or pre-tax 401(k) into a Roth IRA and pay ordinary income tax on the amount converted. Future qualified withdrawals from the Roth are tax-free, and Roth IRAs have no required minimum distributions for the original owner.

Signals That Converting Could Help

• A temporarily low-income year, such as early retirement or a sabbatical.
• Large pre-tax balances that could create big required distributions later.
• A desire to leave tax-free assets to heirs.
• A surviving spouse who would later file single, at higher rates.

Costs and Traps to Watch

• Bracket creep. Convert up to the top of a chosen bracket, not beyond it.
• Medicare premiums. Higher income can raise Part B and D premiums two years later.
• Paying tax from the IRA. Using converted money to pay the tax shrinks the benefit.
• Five-year rules. Each conversion has its own five-year clock for penalty-free access to converted principal if you are under 59½.
• No undo. Conversions cannot be recharacterized.

A Multi-Year Approach

Rather than one large conversion, most households benefit from a series of smaller conversions sized to fill a target bracket each year, revisited every fall once the year's income is clearer.

Example: The Gap Years

A couple retires at 62, delays Social Security to 70 and lives on savings in between. Their taxable income is low during those years, so converting part of their IRA each year to fill a moderate bracket can reduce future required distributions and the taxes on them. The same conversions done while working would have been taxed at higher rates.

When Converting Usually Does Not Help

• You expect a lower tax rate in retirement than today.
• You would need to use IRA money to pay the tax.
• You plan to leave the IRA to charity, which pays no income tax.
• You need the money within five years and are under 59½.

Year-End Timing

Conversions count in the calendar year they happen. Waiting until late in the year gives a clearer picture of income, but leave time for paperwork before December 31.

Key Takeaways

• Convert when today's tax rate is lower than your expected future rate.
• Pay the tax with non-retirement money when possible.
• Watch brackets, Medicare premiums and five-year rules.
• Spread conversions across several years.

Frequently Asked Questions

Is there an income limit for Roth conversions?

No. Anyone can convert regardless of income, unlike direct Roth IRA contributions.

Can I undo a Roth conversion?

No. Since 2018 conversions cannot be recharacterized, so plan the amount carefully.

What is the best age for a Roth conversion?

Often the years between retirement and the start of required minimum distributions, when income may be lower.

Thinking about converting? Ask our financial advisor in Signal Mountain, TN to model the right amount for this year.

This article is for educational purposes only and is not individualized investment, tax or legal advice. Talk with a qualified professional about your specific situation.