January 22, 2026
Roth IRA Conversions A Roth IRA conversion can be powerful to use in your financial planning. But like most financial strategies, it's not right for everyone, and the timing matters considerably. Understanding the Basics: A Roth IRA conversion is the process of moving money from a traditional IRA (individual retirement account) into a Roth IRA. You convert pre-tax retirement savings into after-tax savings. The most common scenario involves converting funds from a traditional IRA to a Roth IRA. However, you can also (sometimes) convert money from other pre-tax retirement accounts, including 401(k)s, 403(b)s, and similar employer-sponsored plans. Here's what makes this conversion significant: traditional retirement accounts are funded with pre-tax dollars. You get a tax deduction when you contribute (if you qualify), but you'll pay ordinary income taxes when you withdraw the money in retirement. Roth IRAs work in reverse. You pay taxes on the money going in, but qualified withdrawals in retirement are completely tax-free if you meet the requirements for tax-free withdrawals. When you do a Roth conversion, you're choosing to pay the taxes now rather than later. You're moving money from a "pay taxes later" account into a "never pay taxes again" account. How Does a Roth IRA Conversion Actually Work? The mechanics of a Roth IRA conversion are relatively straightforward, though the tax implications require careful consideration. You start by deciding how much you want to convert. You don't have to convert your entire traditional IRA balance. You can convert any amount you choose, from a few thousand dollars to the entire account. The money moves from your traditional IRA to your Roth IRA. Here's the critical part: the amount you convert is added to your taxable income for that year. If you convert $50,000, that's an additional $50,000 of income you'll report on your tax return. The tax bill is due when you file your taxes for the year in which you did the conversion. This is why timing and planning are so important. When Does a Roth Conversion Make Sense? If you expect to be in a higher tax bracket in later years. This is perhaps the most common reason to consider a Roth conversion. If you're currently in a lower tax bracket than you anticipate being in during retirement or in later years, paying taxes now could save you money in the long run. This scenario often applies to people early in their careers who expect their income to grow substantially. It can also apply to business owners during a slower year or anyone experiencing a temporary dip in income. You want to reduce future required minimum distributions Traditional IRAs come with required minimum distributions (RMDs) once you reach a certain age. These forced withdrawals can push you into a higher tax bracket, trigger Medicare premium surcharges, and affect the taxation of your Social Security benefits. Roth IRAs don't have RMDs during your lifetime. By converting traditional IRA money to a Roth IRA, you reduce the balance subject to RMDs, giving you more control over your taxable income in retirement. You're planning for estate tax efficiency If you're planning to leave retirement assets to heirs, Roth accounts can be more tax-efficient. Your beneficiaries will inherit a Roth IRA and can take distributions tax-free, whereas inherited traditional IRAs require beneficiaries to pay income taxes on withdrawals. Recent changes to inherited IRA rules have made this consideration even more important. Most non-spouse beneficiaries now must empty inherited retirement accounts within 10 years, which can create significant tax burdens if the account is a traditional IRA. You believe tax rates will increase in the future Some people do Roth conversions based on the belief that federal income tax rates will rise in the coming years. Whether you think this is likely depends on your view of fiscal policy and budget deficits. If you believe rates will increase, locking in today's rates through a conversion could make sense. The Advantages of Roth Conversions Beyond the specific scenarios above, Roth conversions offer several structural advantages worth considering. Tax-free growth forever Once money is in a Roth IRA, all future growth is tax-free, assuming you meet the requirements for qualified distributions. If you convert $50,000 today and it grows to $200,000 over the next 20 years, you'll never pay taxes on that $150,000 in growth. This is particularly powerful if you have a long time horizon. The longer the money can grow tax-free, the more valuable the conversion becomes. Flexibility in retirement Roth IRAs give you more flexibility to manage your taxable income in retirement. You can strategically withdraw from Roth accounts in years when you want to keep your taxable income lower, perhaps to avoid Medicare surcharges or to stay within a certain tax bracket. No required minimum distributions for Roth IRAs The absence of RMDs during your lifetime means you're not forced to withdraw money you don't need. This lets your money continue growing tax-free for as long as you live. Protection against future tax increases A Roth IRA conversion essentially locks in today's tax rates. Whatever happens to tax policy in the future, your Roth IRA won't be affected. The money is already taxed, and future withdrawals remain tax-free. The Disadvantages and Risks of Roth Conversions As attractive as Roth conversions can be, they come with significant drawbacks that you need to understand before moving forward. The immediate tax bill This is the most obvious disadvantage. Converting $50,000 means adding $50,000 to your taxable income. Depending on your tax bracket, this could mean a substantial increase in your tax bill. If you don't have cash available outside of retirement accounts to pay this tax bill, a conversion becomes much less attractive. Using funds from the conversion itself to pay taxes reduces the amount that can grow tax-free and may trigger additional penalties if you're under age 59½. Potential for higher tax brackets A large conversion can push you into a higher marginal tax bracket. The U.S. tax system is progressive, meaning different portions of your income are taxed at different rates. A conversion could cause some of your income to be taxed at rates higher than you typically pay. Impact on other tax benefits The Medicare premium impact deserves special attention. If your modified adjusted gross income exceeds certain thresholds, your Medicare Part B and Part D premiums can increase substantially, and this increase is based on income from two years prior. The Five-Year Rule for Roth Conversions When you convert funds from a traditional IRA to a Roth IRA, you trigger a five-year waiting period for each conversion. This period begins on January 1 of the conversion year. While you pay income tax on the converted amount at the time of conversion, the five-year rule creates an additional layer of restriction on accessing those funds. Each conversion starts its own five-year clock, so multiple conversions mean tracking multiple waiting periods. The rule is designed to maintain the retirement-focused purpose of these accounts while still allowing the tax benefits of Roth conversions for long-term planning. Timing of Roth Conversions The timing of conversions matters for tax planning. You can do conversions at any time during the year, but you might want to wait until later in the year when you have a better sense of what your total income will be. This helps you avoid accidentally pushing yourself into a higher bracket than anticipated. Some people do a series of smaller conversions over several years rather than one large conversion. This strategy, sometimes called "bracket filling," involves converting just enough each year to stay within a target tax bracket. Is a Roth Conversion Right for You? Given all these factors, how do you actually decide if a Roth conversion makes sense for your situation? Start by looking at your current tax situation. What's your marginal tax bracket this year? Do you have any unusual deductions or credits that might lower your taxable income? Next, think about your future tax situation. This requires some educated guessing, but consider factors like expected retirement income, pension payments, Social Security benefits, and whether you'll have other taxable income in retirement. Ask yourself about cash flow. Do you have money outside of retirement accounts to pay the tax bill? If not, the conversion becomes much less attractive. Frequently Asked Questions About Roth Conversions Can I convert my 401(k) to Roth? Yes, but check with your employer. Your 401k must allow for Roth within the plan and for Roth conversions within the plan. Is there a limit on how much I can convert? No. Unlike annual Roth IRA contribution limits, there's no limit on how much you can convert in a given year. You could convert your entire traditional IRA balance if you wanted to and were willing to pay the taxes. When is the best time of year to do a Roth conversion? You can do a Roth conversion any time during the calendar year. However, many people wait until later in the year, often in the fourth quarter, when they have a clearer picture of their total annual income. This timing helps you avoid accidentally converting too much and pushing yourself into a higher tax bracket than you anticipated. It also gives you more time to save up cash to pay the tax bill. Can I reverse a Roth conversion if I change my mind? No. Since the Tax Cuts and Jobs Act of 2017 went into effect, Roth conversion recharacterizations are no longer allowed. Once you complete a conversion, it's permanent. This makes it even more important to carefully consider the decision and run the numbers before converting. How does a Roth conversion affect my Social Security benefits? The conversion itself doesn't affect your Social Security benefit amount. However, the additional taxable income from the conversion could cause more of your Social Security benefits to be taxable in the year you do the conversion. Reach out to Amy directly if you have additional questions. amy.kelly@prudential.com
