What it is:
Moving money from a Traditional IRA to a Roth IRA. You pay ordinary income tax on the amount converted; future growth and withdrawals are tax-free if rules are met.
When it can make sense
- Low-income / gap years: Sabbatical, early retirement, business downturn, or a big deduction—fill up lower tax brackets.
- Before Required Minimum Distributions (RMDs): RMDs start at age 73 under current law (scheduled to rise to 75 in 2033). Converting earlier can shrink future forced withdrawals.
- Market pullbacks: Convert shares when values are down; future rebound grows tax-free.
- Legacy planning: Heirs generally receive Roth dollars tax-free (subject to the 10-year rule and 5-year clock).
When to skip or limit
- You’re already in a high bracket and expect to be lower later.
- You’d need to use IRA money itself to pay the tax (robs the Roth of compounding).
- You’ll need the funds within ~5 years.
- Converting would trigger Medicare IRMAA surcharges or phase you out of credits/deductions you care about.
Gotchas to know (the fine print that matters)
- Pro-rata rule: If you have after-tax dollars in IRAs, each conversion is taxed proportionally—not just the pre-tax part.
- 5-year clocks: Each conversion has its own 5-year window before penalty-free access to that converted principal (prior to 59½).
- State taxes apply too.
- Heirs & timing: Most non-spouse heirs must empty inherited Roth IRAs within 10 years; distributions are typically tax-free if the Roth has met the 5-year rule.
Quick starting points
- Decide how much of your current bracket to “fill.”
- Spread conversions over several years rather than one big hit.
- Pay the tax with cash outside the IRA.
- Coordinate with charitable strategies (e.g., QCDs at age 70½) and year-end income surprises.
A Roth conversion is a tax-rate bet and a flexibility play. Done in the right years, it can meaningfully raise after-tax wealth; done in the wrong years, it can just raise your tax bill.
Want to talk more? Contact Cole Nicholson | 952-277-9222
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.