When a Roth Conversion May Make Sense
A Roth conversion can be useful when you have a lower-income year or expect larger taxable retirement withdrawals later. It also creates a tax bill now. The decision depends on what that bill would be, how you would pay it, and when you expect to use the money.
You can convert part of an account. Comparing a few different amounts often gives you a clearer answer than deciding whether to convert everything.
What happens when you convert
A conversion moves money from a traditional IRA into a Roth IRA. Eligible money from a workplace retirement plan can also be rolled into a Roth IRA, subject to the plan's distribution rules. This article focuses on Roth IRAs.
The previously untaxed portion becomes ordinary income for the conversion year. Money you already paid tax on, called your basis, is not taxed again.
For an IRA conversion, the calculation generally combines your traditional, SEP, and SIMPLE IRA balances and basis. You usually cannot choose to convert only the after-tax dollars from one account. This proportional calculation is often called the pro rata rule.
When a conversion deserves a closer look
| Your situation | What to consider |
|---|---|
| Your taxable income is temporarily lower | A job change, time away from work, or lower business income may create room to convert at a lower tax cost. |
| You have retired but have not started Social Security or required withdrawals | These years may offer an opportunity, depending on your other income and health insurance. |
| Your income is high now and likely to fall soon | Waiting or converting less may be worth comparing. |
| You will need the money soon | The tax bill and withdrawal rules may outweigh the benefit of converting. |
| You have cash available outside retirement accounts | Using it for the tax can leave more money in the Roth, but also reduces your available cash. |
Look beyond your tax bracket
Filling the space below the next federal tax bracket is a starting point. It does not tell you the conversion's full cost.
Additional income can make more of your Social Security taxable, change deductions or credits, and increase state taxes. It can also raise Medicare premiums, which generally use income from two years earlier.
If you buy Marketplace health insurance, a conversion can reduce or eliminate your premium tax credit. For 2026, household income above 400% of the federal poverty line generally disqualifies you from that credit. Repayment caps for excess advance credits also no longer apply.
The useful comparison is your projected tax and related costs with the conversion versus without it. A lower account value during a market decline may reduce the income from converting the same shares, but it does not guarantee a matching percentage reduction in tax.
Understand the two five-year rules
The first rule concerns tax-free Roth IRA earnings. The five-tax-year period starts January 1 of the first tax year for which you funded any Roth IRA, including through a conversion. A qualified withdrawal also requires age 59½ or another qualifying condition, such as disability or death. Waiting five years alone is not enough.
The second rule concerns withdrawing converted money early. Each conversion has its own five-tax-year period, starting January 1 of the conversion year. Withdrawing the taxable portion before that period ends can trigger a 10% additional tax if you are under 59½, unless an exception applies. Reaching 59½ removes that early-withdrawal issue, but does not waive the separate rule for earnings.
Plan the timing and the tax payment
A direct conversion for the current calendar year generally needs to be completed by December 31. Allow time for the financial institution to process it. A conversion cannot be assigned to the prior year like an annual IRA contribution.
A distribution late in the year may still be rolled into a Roth IRA within 60 days in the next year. In that case, the income generally belongs to the distribution year.
Conversions cannot be reversed through recharacterization. That makes the estimate before the transaction important.
The added income may require increased withholding or estimated tax payments. Using IRA money for the tax leaves less to convert, and amounts withheld rather than converted may face an early-distribution tax if you are under 59½ and no exception applies.
Consider required withdrawals and beneficiaries
A required minimum distribution, or RMD, cannot be converted. Address any required withdrawal before arranging the conversion. Converting other money can reduce the traditional IRA balance used for future RMDs. Roth IRAs have no RMDs during the owner's lifetime.
Many adult children must empty an inherited IRA by the end of the tenth year after the owner's death. Some inherited traditional IRAs also require annual withdrawals during that period. Inherited Roth distributions can be tax-free, but earnings still depend on satisfying the original owner's five-year qualification period.
Partial conversions over several years are one option. The amount should reflect your expected income, spending needs, health coverage, and beneficiaries, with room to reconsider each year. Our tax planning page has more information about our services.
This article provides general information. A conversion should be evaluated using your circumstances and the rules in effect when it is made.