Roth Conversions: When They Make Sense — and When They Don't

A Roth conversion — moving money from a traditional IRA or 401(k) into a Roth account and paying the tax now — is one of the more talked-about tax-planning moves in retirement. Done at the right time, it can reduce a lifetime of taxes and leave your heirs a tax-free asset. Done at the wrong time, it's simply prepaying taxes you didn't need to prepay. The whole decision turns on one question: is your tax rate likely to be lower now than it will be when you'd otherwise withdraw the money?

How a conversion works

When you convert, the amount you move from a pre-tax account is added to your taxable income for that year, and you pay ordinary income tax on it. In exchange, that money then grows tax-free in the Roth, qualified withdrawals are tax-free, and — unlike a traditional IRA — a Roth IRA isn't subject to required minimum distributions during your lifetime. You're trading a tax bill today for freedom from taxes on that money later.

When a conversion tends to make sense

Your income is temporarily low. The classic window is the years between retiring and the start of Social Security and required minimum distributions — often your early-to-mid 60s. Income may dip during these years, dropping you into a lower tax bracket, which means conversions get taxed at a lower rate than they would once those income sources turn on.

You expect higher tax rates later. That can be because your own income will rise (RMDs on a large traditional balance can push retirees into higher brackets), or because you believe tax rates generally will be higher in the future. If your future rate will be higher, paying tax now at today's lower rate is the favorable trade.

You want to reduce future RMDs. Large traditional IRA and 401(k) balances generate large required minimum distributions later in retirement, which are fully taxable whether you need the money or not. Converting earlier can shrink that future forced income.

You're leaving the account to heirs. Under current rules, most non-spouse beneficiaries must empty an inherited IRA within ten years. Inheriting a Roth means those withdrawals are generally tax-free, and you've effectively pre-paid the tax at your rate rather than your heirs' — which can be favorable if they're in their peak earning years.

When a conversion usually doesn't make sense

You'd pay the tax from the IRA itself. The math works far better when you can pay the conversion tax with outside, non-retirement money. If you have to withhold from the converted amount to cover the bill, you've shrunk the very balance you were trying to grow tax-free — and if you're under 59½, the withheld portion can trigger penalties.

Your tax rate is higher now than it will be later. If you're in your peak earning years and expect to be in a lower bracket in retirement, converting now means paying tax at your highest rate. That's the opposite of the trade you want.

The conversion pushes you into a higher bracket or triggers other costs. A large conversion can spill into a higher tax bracket, increase the taxable portion of Social Security, or raise Medicare premiums (IRMAA) two years later. This is why conversions are often done in measured annual amounts — "filling up" a tax bracket rather than converting everything at once.

A note for New York residents: New York taxes the converted amount as ordinary income at the state level, on top of federal tax. That added state cost makes the "pay tax now versus later" comparison even more important to run carefully before converting.

The bottom line

A Roth conversion isn't inherently good or bad — it's a bet on tax rates, and the right answer depends entirely on your specific numbers: your bracket this year versus your expected bracket later, where your income falls relative to Social Security and Medicare thresholds, whether you have outside cash to pay the tax, and your goals for the money. Because a conversion is generally irreversible once made, it's worth modeling carefully — ideally as part of a multi-year plan — before pulling the trigger.