Roth Conversions Explained (And When They Actually Make Sense)
Roth conversions get talked about like a magic trick that can lower your taxes forever. They're not a magic trick, and when done at the wrong time, they can actually cost you more in taxes. But when done well, they're one of the most powerful long-term tax strategies available. Let's talk about how they actually work.
If you've heard the term "Roth conversion" and want to know exactly what it means and whether it applies to you, this blog is for you.
What Is a Roth Conversion?
A Roth conversion simply means moving money from a pre-tax account, like a traditional IRA or 401(k), into a Roth IRA. The amount you convert gets added to your taxable income for that year, meaning you're paying tax on it now. In exchange, your money continues to grow tax-free going forward, and qualified withdrawals are completely tax-free.
A common misconception is that a Roth conversion is the same thing as a backdoor Roth IRA, which I've covered in a separate post. A backdoor Roth IRA is a technique for high earners to get money into a Roth IRA despite income limits. A conversion is a broader move: you're taking money you already have in a pre-tax account and moving it into a Roth IRA.
Why Would Anybody Pay Taxes on Purpose?
It really comes down to one core question: do you expect your tax rate to be higher now, or higher later?
If you're in a lower-income year, maybe you're between jobs, waiting for Social Security to start, waiting on other required withdrawals, or your income is just naturally lower for some reason, it may make sense to evaluate a Roth conversion. The reasoning is straightforward: you're paying tax today on dollars taxed at a lower bracket compared to a future date with a potentially higher bracket.
This matters even more once required minimum distributions start. If a large pre-tax balance would force big withdrawals later, converting some of it earlier, year by year, may save meaningfully on taxes over the long term.
The Strategy People Actually Use: Filling Your Bracket
The most common approach isn't converting everything at once. It's done strategically, typically year by year, using a concept called bracket filling.
The idea is simple: figure out how much room you have left in your current bracket before spilling into the next one, and convert up to that limit, nothing more. This allows you to convert meaningful amounts over several years while deliberately managing your tax bill, instead of taking one large conversion that pushes a big chunk of it into a much higher bracket.
What People Commonly Get Wrong
One: Not accounting for Medicare premiums. If you're on Medicare, a large conversion can increase your income enough to raise your Medicare premiums through something called IRMAA. It's a real cost that's easy to miss if you're only looking at the tax bracket.
Two: Using the converted money itself to pay the tax bill. If you pull from the IRA to cover the taxes, you're reducing the amount that actually lands in the Roth, which reduces the long-term benefit. Ideally, the tax is paid from outside funds: withholdings, a savings account, or a brokerage account.
Three: Forgetting it's irreversible. Conversions used to be reversible through something called recharacterization, but that's been gone since tax law changes in 2017. Once you convert, there's no undo button, so this needs to be a thought-out decision, not something done on a whim.
It's Not One-Size-Fits-All
There's no universal right amount to convert, and it's not right for everyone. It depends on your current income, your future income, whether you have a pension, your age, and your estate planning goals. This is exactly the kind of decision that benefits from actually running the numbers rather than following a general rule of thumb.
The Bottom Line
Roth conversions can be an extremely powerful tool, but only when built around your specific situation. If you want to talk about whether conversions make sense for you, feel free to reach out.