With Q4 approaching, many families finally have a clearer picture of yeartodate income. That is the right time to decide whether a Roth conversion makes sense. A conversion moves money from a traditional IRA or other taxdeferred account into a Roth IRA. You pay ordinary income tax on the amount converted this year. In return, future qualified withdrawals from the Roth can be taxfree. The idea is simple. The decision is not. Results depend on timing, tax brackets, and how the move fits your overall plan.
A Versatile Strategy
Investors like conversions for three main reasons:
1. Taxfree withdrawals when the rules are met.
2. No required minimum distributions for the original Roth IRA owner. As of 2024, owners of designated Roth accounts in 401(k) and 403(b) plans also do not have lifetime RMDs. This can reduce forced taxable income in retirement and give you more control.
Know the timing rules:
1. Two tests for qualified Roth IRA earnings: at least five tax years since your first Roth contribution, and a qualifying event such as reaching age 59½, death, disability, or a firsthome purchase (lifetime limit $10,000).
2. Each conversion has its own fiveyear clock for the 10% earlydistribution penalty if you take out converted amounts before 59½. These two fiveyear rules serve different purposes and can both apply.
3. No doovers: conversions made in 2018 or later cannot be recharacterized back to traditional IRAs. Plan before you act.
Being Smart with Conversions
Manage your tax brackets. The converted amount is taxable this year. Large conversions can push you into higher brackets and can increase Medicare premiums through IRMAA. Medicare generally looks back two tax years when setting IRMAA, so a conversion now can affect premiums later.
Watch the prorata rule. If you have aftertax basis in any traditional IRA, the taxable share of a conversion is calculated across all your nonRoth IRAs in aggregate (traditional, SEP, SIMPLE). Basis is tracked on Form 8606, which also instructs you to aggregate account values when computing the taxable portion. Backdoor Roth users should pay close attention.
Use market levels thoughtfully. Converting after a market pullback can move more shares at lower values into the Roth, where any recovery grows taxfree. To avoid trying to time a single bottom, many investors convert in planned tranches.
Choose the right assets. Highergrowth or taxinefficient holdings often benefit most inside a Roth. Lowerreturn or very incomeheavy assets may be better left taxdeferred if today’s tax cost outweighs future benefits. Think in terms of totalportfolio asset location.
Pay taxes with outside cash. If you have withholding taken from the IRA during a conversion and you are under 59½, the withheld amount is treated as a separate distribution that is taxable and may incur the 10% penalty unless an exception applies. Using outside cash preserves more principal inside the Roth.
Mind plan nuances. Many people now hold Roth balances in workplace plans. Owners are not required to take RMDs from Roth IRAs or from designated Roth 401(k) or 403(b) accounts during life. Beneficiaries still follow postdeath distribution rules, and most nonspouse beneficiaries must fully distribute inherited Roth accounts within 10 years.
Project, then execute. Conversions work best as a multiyear plan. Fill target tax brackets intentionally, coordinate with Social Security timing, capital gains, deductions, and charitable gifts, and revisit annually as your income and the laws change.
Putting Conversions in Context
Treat Roth conversions as one lever in a broader tax strategy. In a given year you may prefer to harvest longterm gains, exercise stock options, bunch deductions, or pair a conversion with charitable planning. Qualified charitable distributions from traditional IRAs (age 70½ and up) can reduce income in RMD years and can count toward the RMD. Donoradvised funds can help offset income in hightax years. Coordinate these tools to improve the aftertax outcome of the entire plan.
Conversions also affect estate planning. If you expect to leave large taxdeferred balances, converting during lowerincome years can reduce heirs’ future taxes. Since many nonspouse beneficiaries must empty inherited IRAs within 10 years, shifting some tax to you at known rates can help, especially if you have cash to pay the bill and a long horizon for Roth growth.
State taxes matter. Moving from a hightax to a lowtax state, or the reverse, can change the math. Plan features, withholding rules, and the availability of inplan Roth rollovers also affect execution. Check your specific documents.
The upshot
Roth conversions can improve lifetime aftertax wealth, but they are not automatic and not free. Success comes from getting the details right. Know the two fiveyear rules. Avoid prorata surprises. Size conversions to your brackets. Account for Medicare effects. Coordinate with the rest of your plan. Build a multiyear projection, then adjust as your life and tax laws change.
Disclosure: Tax laws and regulations can change. This overview is educational and not tax advice. Consult a qualified tax advisor about your situation.