What Is a Roth Conversion?
A Roth conversion moves money from a traditional IRA, 401(k), or other pre-tax retirement account into a Roth IRA. You pay income tax on the converted amount now, but future growth and qualified withdrawals from the Roth IRA are completely tax-free.
Why Consider a Roth Conversion?
Roth conversions can be advantageous when:
- You’re in a lower tax bracket now: Pay taxes at today’s lower rate rather than potentially higher future rates.
- You expect tax rates to rise: Current rates are historically low; future increases are possible.
- You have years until retirement: More time allows tax-free growth to compound.
- You want to reduce RMDs: Roth IRAs have no required minimum distributions during your lifetime.
- Estate planning goals: Roth IRAs pass to heirs with tax-free growth potential.
How to Execute a Roth Conversion
- Open a Roth IRA if you don’t already have one at your preferred custodian.
- Decide how much to convert: You can convert any amount—there’s no annual limit.
- Request the conversion from your IRA custodian. Many allow online requests.
- Pay estimated taxes: The converted amount is added to your taxable income. Don’t use IRA funds for taxes—this creates additional taxable events.
- Report on your tax return: The conversion appears on Form 8606.
Tax Planning Strategies
Smart conversion strategies minimize tax impact:
- Fill up your tax bracket: Convert just enough to reach the top of your current bracket without pushing into the next one.
- Convert in low-income years: Job transitions, early retirement, or sabbaticals create opportunities.
- Spread conversions over multiple years: Avoid a single large conversion that spikes your tax rate.
- Consider state taxes: Some states don’t tax retirement income or have lower rates.
The Five-Year Rule
Converted funds must remain in the Roth IRA for five years before you can withdraw them penalty-free (if you’re under 59½). Each conversion has its own five-year clock. Earnings always require the account to be open for five years AND you must be 59½ for tax-free withdrawal.
