Retirement often creates something you may not have had during your working years: more control over when taxable income shows up on your return.
That can make the years immediately before and after retirement an important time to consider whether Roth conversions belong in your overall retirement strategy.
A Roth conversion generally involves moving money from a traditional IRA or another eligible pre-tax retirement account into a Roth IRA. Previously untaxed amounts converted are generally included in taxable income for that year. In exchange, qualified Roth IRA withdrawals can potentially be tax-free.
So, should you convert?
For some people, the answer may be yes. For others, paying additional taxes today may accomplish very little. The decision depends less on whether Roth accounts are “better” and more on when you want to pay the tax and what the rest of your retirement income picture looks like.
Why the Years Around Retirement Can Matter
While you are working, your salary may already fill much of your available tax bracket.
Then you retire.
Your paycheck stops, but Social Security may not have started yet. Pension income may begin later. Required minimum distributions may still be years away.
That can create a temporary period in which your taxable income is lower than it was while you were working—and potentially lower than it will be later in retirement.
That gap is sometimes referred to as a tax-planning window.
A Roth conversion during those years can intentionally recognize some taxable income today rather than leaving all of your pre-tax retirement savings to be taxed later.
What Exactly Happens When You Do a Roth Conversion?
Suppose you have money in a traditional IRA.
You instruct the financial institution holding the account to move some of that money into a Roth IRA.
If the money being converted has never been taxed, the converted amount is generally added to your taxable income for that year. Roth IRA contribution income limits and Roth conversion rules are different; the IRS generally allows eligible traditional IRA amounts to be converted regardless of adjusted gross income.
Once the money is inside the Roth IRA, future qualified withdrawals are generally not included in taxable income.
That creates the fundamental tradeoff:
Pay some tax now in exchange for potentially reducing taxable retirement income later.
When Might a Roth Conversion Make Sense?
There are several circumstances I look for when evaluating this with clients.
1. Your Income Temporarily Drops After Retirement
This is one of the most common opportunities.
Imagine retiring at 62 but delaying Social Security for several years. You may have a pension, cash reserves, or taxable investments available to help fund spending while your taxable income temporarily declines.
Instead of allowing that lower-income period to go unused, you may decide to convert part of a traditional IRA to a Roth IRA.
The goal is not necessarily to convert everything.
It may be to convert just enough each year to take advantage of a tax range you are comfortable with.
2. You Expect Significant Required Minimum Distributions Later
Pre-tax retirement accounts generally cannot remain tax-deferred forever.
Required minimum distribution rules depend on factors including your age and birth year. If you have accumulated a substantial traditional IRA or 401(k), future required distributions could create taxable income whether you need the money for spending or not.
Roth IRAs owned by the original account owner are generally not subject to lifetime required minimum distributions.
A series of Roth conversions before required distributions begin can potentially reduce the amount of pre-tax retirement money that will eventually be subject to those rules.
3. You Expect Your Future Tax Situation to Be Different
Nobody knows with certainty what tax laws will look like decades from now.
But you can compare what you know today with your expected retirement picture.
Will you have:
- A pension?
- Social Security?
- Rental income?
- Significant required minimum distributions?
- A spouse with substantial retirement assets?
- Income from a business or investments?
If those income sources are likely to keep taxable income relatively high later, intentionally recognizing some income earlier may deserve consideration.
4. You Want More Flexibility Over Future Taxable Income
One potential advantage of having different types of accounts is flexibility.
A retiree with taxable investments, traditional retirement accounts, and Roth accounts has more choices about where to take money from each year than someone whose entire retirement portfolio is pre-tax.
That flexibility can matter when you have a large one-time expense, want to manage taxable income, or are coordinating withdrawals with Social Security, Medicare, or other income sources.
When Might a Roth Conversion Not Make Sense?
Roth conversions are not automatically good planning.
There are several reasons converting more—or converting anything at all—may deserve caution.
You Are Already in a High-Income Year
If you are still earning a substantial salary, receive a large bonus, sell a business, or recognize another major source of income, adding a conversion may cause additional income to be taxed at rates you might otherwise avoid in a future year.
You Expect Your Tax Rate to Fall Significantly
If your retirement income will be substantially lower than your current income, paying tax today at a relatively high rate simply to avoid potentially lower taxes later may not improve your outcome.
You Need the Retirement Account Itself to Pay the Tax
The source of the money used to pay the tax matters.
Taking additional money out of a retirement account to cover the tax can change the economics of the conversion, and additional rules may apply depending on your age and circumstances.
The Conversion Creates Unintended Consequences Elsewhere
This is where Roth planning becomes more nuanced.
A conversion does not exist in a vacuum. Increasing taxable income can affect other financial decisions and income-related thresholds.
One example is Medicare. Higher modified adjusted gross income can result in higher Medicare Part B and Part D premiums for certain beneficiaries.
Depending on your circumstances, additional income may also interact with Social Security taxation, deductions, credits, charitable strategies, and other planning decisions.
That is why I generally prefer to model conversions rather than simply choose an arbitrary amount.
Should I Convert My Entire IRA at Once?
Usually, that is not the first strategy I would evaluate.
For many households, the more useful question is:
How much should I convert this year?
A large conversion can push additional income into higher tax brackets and may create other income-related consequences.
Instead, it may make sense to evaluate a multi-year strategy.
One year you might convert enough to use part of an available tax bracket. The following year, you recalculate based on that year's income, deductions, tax rules, Social Security, pension income, market values, and other changes.
The result may be several smaller conversions rather than one large transaction.
What If I Have a 401(k) Instead of an IRA?
Your options depend in part on your employer's retirement plan.
Some plans permit in-plan Roth conversions, allowing eligible pre-tax amounts to be transferred to a designated Roth account inside the plan.
After leaving an employer, another possibility may be rolling eligible retirement-plan assets to an IRA and then evaluating whether a Roth conversion is appropriate.
These are separate decisions.
Whether you should roll over a 401(k) and whether you should perform a Roth conversion should each be evaluated on their own merits.
Common Roth Conversion Mistakes to Avoid
Treating a Roth Conversion Like an Investment Decision
A Roth conversion generally does not require you to change your investment strategy.
You could potentially own similar investments before and after the conversion. What changes is the tax character of the account holding those investments.
That is why I view Roth conversions primarily as part of retirement-income and tax-aware planning rather than simply as an investment decision.
Looking Only at This Year's Tax Bill
It can be uncomfortable to voluntarily create a larger tax bill today.
But focusing only on this year's tax cost can miss the larger planning question.
You are really comparing:
Tax paid today
with
The potential lifetime tax consequences of leaving the money in a pre-tax account.
That analysis may include future required distributions, Social Security, pensions, survivor income, legacy goals, and the taxation of retirement assets inherited by beneficiaries.
Sometimes paying tax earlier improves the long-term picture.
Sometimes it doesn't.
The planning is in determining which situation applies to you.
What Information Should You Review Before Deciding?
Before making a Roth conversion, I would want to understand your broader financial picture, including:
- Your current taxable income
- Expected income between now and retirement
- Pension income
- Social Security timing
- Traditional IRA and 401(k) balances
- Roth balances
- Taxable investment accounts and cash reserves
- Expected retirement spending
- Required minimum distribution timing
- Medicare timing
- Charitable giving plans
- Estate and beneficiary goals
- The source of funds that would pay the conversion tax
That is why a Roth conversion should rarely be evaluated by looking at one account statement.
It is a whole-financial-picture decision.
Frequently Asked Questions About Roth Conversions
Can I Convert to a Roth IRA if My Income Is High?
Generally, yes. Roth IRA contributions have income restrictions, but eligible traditional IRA amounts generally may be converted to a Roth IRA regardless of adjusted gross income.
Do I Have to Convert My Entire IRA?
No. Partial conversions are generally allowed, which makes it possible to evaluate an appropriate amount from year to year.
Can I Undo a Roth Conversion if I Change My Mind?
Under current law, Roth conversions generally cannot be recharacterized back to a traditional IRA. That makes planning before completing the transaction particularly important.
Does a Roth Conversion Count as Taxable Income?
Previously untaxed amounts converted from a traditional IRA or eligible pre-tax retirement account are generally included in taxable income in the year of conversion.
Do Roth IRAs Have Required Minimum Distributions?
Roth IRAs owned by the original account owner are generally not subject to lifetime required minimum distributions under current law.
The Question Isn't Simply “Should I Convert?”
A better question is:
Would paying tax on some of my retirement money today put me in a better position over the rest of my life?
That requires looking beyond this year's tax return.
For some people, the years surrounding retirement can create an opportunity to gradually reposition part of their retirement savings.
For others, converting may simply accelerate taxes unnecessarily.
The appropriate strategy comes from coordinating the conversion with your retirement income, investments, Social Security, pension, Medicare considerations, estate planning, and overall financial strategy.
That is the kind of decision financial planning is meant to help you make.