Roth Conversion Basics: When It Makes Sense to Convert

Quick overview

A Roth conversion transfers funds from a Traditional IRA, SEP, SIMPLE, or eligible employer plan into a Roth IRA. You pay ordinary income tax on the converted amount in the year of the conversion; future qualified withdrawals from the Roth are tax-free. Conversions are permanent (you can’t recharacterize conversions for tax years after 2018), so planning matters.See IRS Roth IRAs page.

Why a Roth conversion can make sense

In practice, I recommend considering a conversion when one or more of the following are true:

• You expect your future tax rate in retirement will be higher than your current rate. Converting locks in today’s rate.
• You have a low-income or below-normal-income year (e.g., after a job change, career break, or when taking capital losses). Partial conversions in these years minimize tax friction. (See our guide on using conversions in low-income years: How to Use Roth Conversions Strategically in Low-Income Years).
• You want to reduce required minimum distributions (RMDs) from traditional accounts—Roth IRAs are not subject to RMDs during the original owner’s lifetime. This can help manage taxable income later.
• You plan to leave tax-free assets to heirs. Heirs receive Roth distributions tax-free (subject to inherited Roth rules), which can be an estate-planning advantage.

Each decision depends on your current tax bracket, expected future income, state taxes, and retirement timeline.

How conversions actually affect your taxes and benefits

• Tax hit today: Converted amounts are added to your taxable income for the year. That can push you into a higher federal bracket and increase state income taxes.
• Medicare premiums and IRMAA: Higher reported income may raise Medicare Part B and Part D premiums through IRMAA for 12–24 months (depending on when SSA reviews your tax returns). Keep this timing in mind if you’re near Medicare age. See Medicare resources for details.
• Social Security taxation: Increased provisional income from conversions can raise the percentage of Social Security benefits that are taxable.
• No income limits: Since 2010, the law allows anyone to convert to a Roth regardless of income; contribution limits still apply for direct Roth contributions, but not for conversions.IRS Publication 590-A/B.

Practical tip: pay conversion taxes from cash or non-retirement accounts. Using retirement funds to pay conversion taxes reduces the power of the conversion and may trigger penalties if you are under 59½.

Timing and strategy: common approaches

1) Partial conversions over several years

• Spread conversions to stay inside a preferred tax bracket. This softens the tax bite and reduces the chance of spawning higher Medicare premiums or state taxes. Our article on partial conversions covers pros and cons in more detail: Pros and Cons of Partial Roth Conversions Over Several Years.

2) Convert in low-income years

• If you expect a year with unusually low taxable income—between jobs, early retirement before RMDs, or after deductible losses—do more conversions then. Less income means less tax on converted dollars.

3) Convert before a known tax increase

• If you expect your marginal tax rate to rise (higher wages, policy changes, or higher taxable retirement income), converting earlier can be beneficial.

4) Roth ladders for early retirees

• If you plan to retire before age 59½ and need tax-free cash before taking Social Security or RMDs, a Roth ladder converts small amounts early, waits five years, then withdraws converted principal penalty-free.

5) Estate planning conversions

• For those planning to pass assets to heirs who might be in higher tax brackets, Roth conversions create tax-free assets for beneficiaries.

Specific rules to know (short, essential list)

• Recharacterizations eliminated: You cannot undo a Roth conversion for tax years after 2017. Confirm conversions before filing taxes.IRS Roth IRAs.
• Five-year rule(s): There are two relevant five-year rules: (1) A Roth IRA must have met the five-year holding period before earnings can be withdrawn tax-free as a qualified distribution (counted from first contribution or conversion); (2) each conversion may have its own five-year period to avoid the 10% early-distribution penalty on converted amounts withdrawn before age 59½. These rules differ—read them carefully and consult Publication 590.
• Tax year inclusion: Converted amounts are taxed in the year the conversion is processed.
• No income limit on conversions: Anyone can convert regardless of income, but converted amounts increase taxable income.

Authoritative sources: IRS Publication 590-A and 590-B and the IRS Roth IRAs page provide the governing rules and examples (see https://www.irs.gov/retirement-plans/roth-iras).

Simple conversion example (how to model it)

Scenario: You’re in the 12% federal bracket and have a $50,000 Traditional IRA. If you convert $20,000 this year:

• Tax on conversion (federal only) ≈ $2,400 (12% × $20,000)
• State tax (if any) adds to the bill.
• If you can pay the $2,400 from savings, the $20,000 grows tax-free and future qualified withdrawals are tax-free.

Compare that to leaving $20,000 in the Traditional IRA and paying taxes later at your expected future bracket. Use a multi-year projection to estimate the breakeven date—when the upfront tax equals the tax savings in retirement.

Practical note: If you expect higher investment returns inside the Roth, the tax-free compounding magnifies benefits of converting earlier.

Common mistakes and how to avoid them

• Converting too much in one year: This can push you into a higher bracket and spike Medicare premiums.
• Paying conversion taxes from the converted account: This reduces the converted principal and may trigger penalties if you’re under 59½.
• Overlooking state tax: Some states tax conversions differently; make sure you model state income tax.
• Ignoring the five-year rule: If you withdraw converted funds early, you may face penalties if the applicable five-year rule isn’t met.
• Failing to coordinate with other tax events: Capital gains, large bonuses, or selling a home can interact badly with conversion income.

Checklist before you convert:

• Project your 12–24 month taxable income.
• Model federal and state tax impact and IRMAA/Medicare effects.
• Ensure you have (non-retirement) funds to pay the tax.
• Consider partial conversions across years.
• Discuss implications for Social Security taxation and Medicaid/benefit eligibility.

Where Roth conversions fit in a broader retirement plan

Roth conversions are a tax-timing tool, not a universal solution. I use them with clients to create tax diversification: a mix of taxable accounts, tax-deferred accounts, and tax-free Roth assets. This trio gives more flexibility in retirement to manage taxable income, control Medicare premium exposure, and meet estate-planning goals.

If you want deeper tactical frameworks, see our decision guides on when to convert: When to Convert a Traditional IRA to a Roth: Key Considerations.

Closing practical advice

In my practice, the most successful conversions are planned multi-year strategies tailored to expected income paths, Medicare timing, and estate goals. Start with a conservative partial-conversion plan during low-tax years, pay taxes from outside the IRA, and track the five-year windows for each conversion.

Professional disclaimer
This article is educational and not personalized tax or investment advice. Tax laws change; confirm details with current IRS guidance (Publication 590-A/B and the IRS Roth IRAs webpage) and consult a CPA or fee-only financial planner before making conversion decisions.

Authoritative sources and further reading

• IRS: Roth IRAs (Publication 590-A and 590-B) — https://www.irs.gov/retirement-plans/roth-iras
• FinHelp articles mentioned above: “How to Use Roth Conversions Strategically in Low-Income Years,” “Pros and Cons of Partial Roth Conversions Over Several Years,” and “When to Convert a Traditional IRA to a Roth: Key Considerations.”