What is a Roth Conversion?

A Roth conversion is when you take money from a traditional retirement account (like a traditional IRA) and move it into a Roth IRA. The big difference is that with a traditional account, you usually pay taxes at withdrawal, but with a Roth IRA, you pay taxes upfront during the conversion. This allows the money to grow and be taken out tax-free later.

Essentially, through a Roth conversion, you’re opting to pay taxes now to avoid them in the future.

Why Would You Volunteer to Pay Taxes Upfront?

The answer: you’re making a calculated decision that paying taxes now will reduce the amount of taxes that you will pay over your lifetime. Meaning, by paying some additional taxes today, you’re reducing your tax burden in the future.

An effective way to estimate your lifetime tax burden is through a comprehensive financial plan. Once you’ve established a baseline for lifetime taxes owed, you can compare different Roth conversion strategies side-by-side. While conversions will likely increase your tax bill in the short term, in the long run, you’ll pay less in taxes throughout retirement.

Years of Low Taxable Income

Of course, if you believe tax rates will be higher in the future, that’s another reason a Roth Conversion could be more compelling. Higher tax rates mean every dollar you withdraw from a tax-deferred account will cost you more.

Taxable income in retirement also affects more than your annual tax bill:

• Social Security benefits: Higher taxable income can make more of your benefits taxable.
• Medicare premiums (IRMAA): Income above certain thresholds can increase Part B and Part D premiums.
• Tax deductions and credits: Higher income may reduce certain tax benefits.

For these reasons, proactive investors should plan their taxable income ahead of time to avoid potential pitfalls.

Questions to Ask When Considering Roth Conversions:

• What does your current income look like versus in the future?

  More specifically, how much taxable income do you have today versus what your taxable income looks like next year, five years from now and ten years from now. For many investors, the key thresholds will be starting Social Security benefits and taking Required Minimum Distributions, which begin at age 73 for those born 1959 or later. In both cases, these events increase taxable income significantly and may reduce the benefit of future Roth Conversions.

• How long of a runway do you have?

  The longer your runway before household income increases significantly, the more beneficial a Roth Conversion strategy can be. Compare it to contributing to a 401(k): contributing for 30 years is significantly more valuable than contributing for 3 years. Not only because of compounding but because a longer time horizon can allow investors to make more measured, strategic moves than those trying to force an impact in a short period of time.
  

• Are you interested in leaving your children money?

  Qualified distributions from an inherited Roth IRA are generally tax-free, and while beneficiaries are typically required to fully distribute the account within ten years, those assets continue growing tax-free throughout that period. Other assets, such as brokerage accounts and real property, may benefit from a step-up in cost basis at inheritance, but they do not offer the same ongoing tax-free growth potential. One important caveat: if your current tax rate is higher than the rate your beneficiaries are likely to face when they inherit, paying taxes now through a conversion may not always be the most efficient approach. A thoughtful analysis of both sides of that equation is essential before moving forward.

• Can it benefit my estate plan?

  It depends. For some clients, a Roth conversion can strengthen an estate plan by allowing taxes to be paid now so theirs may inherit tax-free assets later. Roth IRAs also have no lifetime RMDs for the original owner, giving assets more time to grow and their beneficiaries greater flexibility. This can help reduce future tax burdens and support more efficient wealth transfer, but the decision should be based on your tax situation, how you want to leave assets, and broader financial goals.

• Can it benefit my charitable giving goals?

  The main rule for all charitable giving is simple – don’t give cash! For retirees with charitable goals, tax-aware strategies can make giving more efficient. Qualified Charitable Distributions (QCDs) allow individuals age 70½ or older to give directly from a traditional IRA to a qualified charity without increasing taxable income, while also satisfying required minimum distributions. This may help lower adjusted gross income and Medicare premium surcharges. Paired with Roth conversions, QCDs can reduce future taxable IRA balances, preserve more tax-efficient assets for heirs, and support a more intentional legacy plan.

• Are you a married couple and filing jointly?

  One of the most overlooked reasons to use a Roth Conversion strategy is to protect a surviving spouse from a higher tax bill in the future. When one spouse passes, the survivor typically moves from a joint filing status to a single filer, often pushing the same income into higher tax brackets. Converting assets to a Roth while both spouses are living can help reduce that future exposure.

Roth conversions can be a compelling and valuable tool in a retirement plan, but whether they make sense for your situation depends on careful planning to determine if it makes sense for your specific situation.