Converting a traditional IRA to a Roth IRA means paying ordinary income tax on the converted amount now, in exchange for tax-free growth and withdrawals forever. Whether it's worth it depends on your current vs. future tax rates — and the math is more nuanced than most people realize.
How a Roth Conversion Works
- •You move funds from a traditional IRA (pre-tax) to a Roth IRA (post-tax)
- •The converted amount is added to your taxable income for that year
- •You pay federal (and state) income tax on the conversion
- •From then on, the money grows tax-free and can be withdrawn tax-free in retirement
- •No RMDs (Required Minimum Distributions) from Roth IRAs during your lifetime
When a Roth Conversion Makes Sense
- •Low-income year: Lost job, took parental leave, early retirement before Social Security — convert in a year when your marginal rate is lower
- •Before RMDs: Ages 59½–72 can be a "Roth conversion window" if income is low and RMDs haven't started
- •Market downturn: Converting when your portfolio is down reduces the tax bill (and more shares convert for the same dollar)
- •High future tax expectation: If you expect to be in a higher bracket in retirement (large RMDs, pension, Social Security), pay today's lower rate
- •Estate planning: Roth IRAs pass to heirs tax-free; traditional IRAs transfer a tax burden
When a Roth Conversion Doesn't Make Sense
- •You're currently in a high tax bracket (32%+) and expect to be in a lower bracket in retirement
- •You'll need the converted money in less than 5 years (Roth has a 5-year rule)
- •You'd have to pay the conversion tax from the IRA itself — this dramatically reduces the benefit
- •You live in a high-tax state that you plan to leave before retirement
The sweet spot for Roth conversions: convert enough each year to "fill up" your current tax bracket without pushing into the next one. For example, if you're in the 12% bracket with room before hitting 22%, convert just enough to stay at 12%.