Roth conversions, if done right, can lower your tax bill over your lifetime. But be careful. Roth conversions pose traps, and the unwary can easily get caught. Here are eight factors to consider in deciding whether to convert all or part of a traditional IRA to a Roth IRA.
1. Present and future tax rates
A Roth conversion is a taxable event in the year of the switch. So, if you expect that the income tax rate you will pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous.
2. Roths offer several advantages
You can withdraw contributions at any time tax-free. Distributions of Roth earnings are tax-free, provided you are 59½ or older and at least five years have passed since you first put funds in any Roth IRA. Roth IRAs don’t have required minimum distributions (RMDs), so the money can stay in the account, generating tax-free earnings. Also, conversions by the original IRA owner can ease the pain of the 10-year cleanout rule for inherited IRAs. Many non-spouse beneficiaries of inherited Roth IRAs would still have to empty the accounts within 10 years, but the money would be tax-free to them, unlike beneficiaries of traditional IRAs.
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3. Multi-year strategy
It’s best to look at Roth conversions as a multi-year planning tool and not as a one-time-only decision. Doing conversions in increments over time helps you space out the tax hit. Review your income and deductions each year and determine with your financial adviser the optimal amount of traditional IRA money to convert so that the conversion doesn’t move you into a higher tax bracket or cause you to lose out on tax breaks.
4. Your adjusted gross income matters
All five tax breaks or benefits begin to phase out at modified adjusted gross income levels above a certain threshold. Your modified adjusted gross income also determines whether you will be hit with the 3.8% surtax on net investment income and whether your Social Security benefits are taxed. You don’t want the additional income from a Roth conversion to cause you to lose deductions and credits you could otherwise be entitled to. Using a multi-year strategy and doing incremental conversions can help you manage this.
5. Medicare premiums
The additional income from a Roth conversion can trigger higher Medicare premiums, known as IRMAA. Individuals with 2023 modified adjusted gross incomes over $212,000 for joint filers and $106,000 for singles pay a monthly surcharge in 2025 for Parts B and D coverage on top of their regular premiums. These figures will rise a bit for 2025 modified adjusted gross income used for figuring 2027 monthly Medicare premium surcharges. Modified adjusted gross income includes income from a Roth conversion.
6. Paying the tax on converted funds
A Roth conversion is treated as a taxable distribution from your traditional IRA when those IRA funds are contributed to the Roth. By default, the IRA custodian will withhold 10% federal income tax. This withheld amount is treated as a distribution to you on which you must pay tax, in addition to the actual money moved to the Roth. In essence, you lose out on a portion of the IRA money being converted into the Roth. This is why financial experts advise you to pay tax owed on the conversion with non-IRA funds, if possible, and you ask the IRA custodian to withhold 0% from the converted funds.
7. IRA owners of RMD age
8. You can’t undo a Roth conversion
Prior to 2018, if you did a Roth conversion, you could undo it and eliminate the tax bill by transferring the funds back to your traditional IRA. This made sense if the Roth lost money shortly after the conversion. Now if you do a conversion, you are stuck with your tax bill.
