When Should You Convert Your Traditional IRA into a Roth IRA?

One of the less commonly known, but powerful tools in retirement planning is the Roth conversion. We are going to touch on some of the unique situations when this tool might be beneficial, but first, what is a Roth Conversion?

A Roth conversion is when you take money from a Traditional IRA or 401(k) and you convert it into a Roth IRA. You take pre-tax money and turn it into after-tax money. Additionally, it’s important to note that you can do a Roth conversion at any age.

There are a couple of very important things that happen in this situation:

  1. All the money you convert is taxable at ordinary income tax rates in the year that you make the conversion
  2. Once the money is converted to a Roth IRA, you never pay tax on it again

As you can see, a Roth conversion is really just a decision of whether you want to pay tax now, or pay tax later. Depending on your situation, there may be some key reasons why it might make sense to go ahead and pay the tax now, and never have to pay taxes on those dollars again. Let’s explore a few.

If your income for the year is lower than a normal year.

Life changes quickly, and even year-to-year income can fluctuate pretty dramatically due to job cuts, pay cuts, retirement, medical reasons, and much more. If you find yourself in a year where your income is lower than normal, then that might be a great year for a Roth conversion. Since all of the money you convert will be added to your income for the year, you may be able to stay in a lower tax bracket by converting funds during a lower-income year.

If you think your taxes are going to be higher in the future than they are now.

With the passing of the Tax Cuts and Jobs Act, current tax rates are at historic lows for many income earners. There is a fierce debate as to which direction tax rates will go from here, but if you believe tax rates will be higher in the future, it might make sense to lock in a lower tax rate now using a Roth conversion. 

Also, if you think your income is going to go up in the future, it can make sense to do a Roth conversion now, while you are in a lower tax bracket, rather than waiting to pay the tax later. This is true for many who are just starting out in their careers with years of pay increases ahead of them.

If you plan to pass the money to a high-income earning beneficiary.

If you are planning to pass your assets to a high-income earner, such as a son or daughter with a lucrative career, then it can be beneficial to convert the money at your lower tax rate first. This results in the least amount of money going to pay taxes, keeping more money with you and your beneficiaries. This also means that your beneficiaries get a very nice, tax-free gift.

Another perk is that if you convert your Traditional IRA to a Roth IRA, you won’t have to deal with required minimum distributions (RMD) any longer, as Roth IRA’s have no RMD’s.


Now that we’ve explored a few situations when it might make sense to do a Roth conversion, let’s summarize some of the key points.

A Roth conversion is when you take pre-tax money from a Traditional IRA or 401(k), and you convert it into Roth money, also known as “after-tax”. There is no age restriction or limit on the amount of the conversion.

This conversion allows you to pay the tax now, at ordinary income tax rates, and then never pay taxes on that money again.

This is really just a tax calculation. Am I going to pay less in taxes now, or less in taxes later?

If your income is low in any given year, you can take advantage of that opportunity by doing some Roth conversions. If you think your taxes are going to be higher in the future because of legislation changes or simply your earnings going up, then it can be beneficial to lock in the lower rates now, and never pay taxes again. Lastly, if you plan to pass money to high-earning beneficiaries using a Traditional IRA, then it can be beneficial to convert the money first, so your beneficiaries avoid paying any of the tax at their higher rates. You might also cut your tax bill over the long-term, if you are taking Required Minimum Distributions (RMDs).

As you can see, the Roth conversion technique has powerful tax-saving capabilities but is also very situation-specific. If you think it might be valuable in your case, I highly recommend consulting with a CFP® professional to run a Roth conversion analysis. It should also include a careful tax analysis of the tax impact upon conversion. If you are interested in exploring this strategy further, I offer a complimentary Roth conversion analysis as part of my discovery process. Feel free to schedule a time and we can see if it makes sense for your situation.

Was This Helpful?

If you want to get more financial wellness tips like this in your inbox, subscribe to our weekly newsletter!
  • This field is for validation purposes and should be left unchanged.