Roth Conversion

A Roth conversion is the process of transferring money from a pre-tax retirement account, such as a traditional IRA or traditional 401(k), into a Roth IRA. Because the original contributions were made with pre-tax dollars, the converted amount is typically treated as ordinary income in the year of the conversion and taxed accordingly.

One reason people may consider Roth conversions is the potential for tax-free growth and tax-free qualified withdrawals in retirement. Once funds are in a Roth IRA and the account has been open for at least five years, qualified distributions — including both contributions and earnings — are generally not subject to federal income tax. This could be particularly valuable if you expect to be in a higher tax bracket in the future or if tax rates rise.

The timing of a Roth conversion can matter significantly. Some individuals explore converting during years with lower taxable income, such as early retirement years before Social Security and RMDs begin. Converting in these gap years may allow you to fill up lower tax brackets at a reduced rate. However, it is important to consider the broader tax implications, including the impact on Medicare premiums (IRMAA), the taxation of Social Security benefits, and state income taxes.

There is no income limit or cap on the amount you can convert in a given year. However, unlike Roth IRA contributions, conversions cannot be undone (the "recharacterization" of Roth conversions was eliminated by the Tax Cuts and Jobs Act of 2017). Careful planning around the amount and timing of conversions may help optimize the long-term tax outcome.

It may also be worth considering how Roth conversions interact with your estate plan. Roth IRAs do not have RMDs during the original owner's lifetime, which could allow the account to grow longer. Inherited Roth IRAs generally must be distributed within 10 years for non-spouse beneficiaries, but those distributions may be received tax-free.