When Does a Roth Conversion Make Sense?

financial advisor

By Joe Globensky, RFC®

roth conversion

There has been a lot of discussion lately about why you should convert your traditional retirement assets into a Roth IRA. And there are some very valid reasons, for some people. But it is not necessarily good advice for everyone. Let’s help YOU answer the question, “When Does a Roth Conversion Make Sense?”

What is a Roth Conversion?

A Roth IRA conversion is a strategy you can use to change your tax-deferred retirement savings, like a traditional IRA or 401(k), into Roth savings so you can enjoy tax-free withdrawals in retirement.

Completing a Roth conversion is pretty straightforward, but you must be prepared to pay income taxes on the funds that you convert. And this is the main reason why a Roth conversion makes sense for some investors but can be a mistake for others.

Income Taxes

In deciding to do a Roth conversion, it’s important to know your marginal income tax bracket today, but you will also need to estimate your marginal income tax bracket when you plan to start withdrawing money from your Roth IRA.

If you are in a low tax bracket today and expect to be in a higher tax bracket when you retire, a Roth conversion can make a lot of sense.  Let’s look at an example:

Let’s say your current traditional IRA balance is $20,000, your current tax bracket is 12%, and we’ll assume your tax bracket in retirement, 20 years from now, will be 24%. If your traditional IRA grows at a 6% compounded annual rate of return, your balance in 20 years would be $64,143.  If you then liquidate the account to fund your retirement, your tax bill would be $15,394 ($64,143 x 24%). Leaving you with $48,749.

What if you convert your current IRA balance into a Roth IRA instead?  You would owe income tax of $2,400 ($20,000 x 12%).  While it is most advantageous to pay these income taxes from other funds, let’s assume you pay them from your converted funds, so your starting Roth IRA balance is $17,600.  Compounded at the same 6% annualized rate of return, your Roth IRA balance in 20 years would be $56,446, and any money you distribute will be tax free.  Your after-tax balance is almost $7,700 higher in the Roth IRA than the traditional IRA.

The general rule of thumb – if you think you will be in a higher tax bracket in retirement than you are now, a Roth conversion may make sense.  And, while income taxes are an important consideration in determining if a Roth conversion makes sense, there are other considerations as well.

Five-Year Rule

The five-year rule for Roth IRA conversions requires you to leave the converted funds in the Roth IRA for at least five years before withdrawing them, otherwise, you will pay a 10% early withdrawal penalty if you are under age 59-½.

The five-year clock begins on January 1st of the year in which you do the Roth conversion.  If your Roth conversion happens on June 30, 2022, your five-year clock starts January 1, 2022.  And, if you do multiple Roth conversions over a period of years, each conversion has a separate five-year rule.  You will need to keep this in mind so you know how much can be withdrawn penalty-free.

Tax-Free Inheritance for Your Heirs

The SECURE Act made a major change for IRA beneficiaries.  In most cases, for non-spouse beneficiaries, the inherited IRA must be fully distributed within 10 years after the original owner passed away. 

If the inherited IRA is a traditional IRA, all distributions are taxed at the inheritor’s income tax rate.  However, if the inherited IRA is a Roth IRA, the inheritor will not have to pay any federal income tax on their withdrawals as long as the account has been open for at least 5 years.

Required Minimum Distributions

Traditional IRAs force you to take Required Minimum Distributions (RMDs) every year after you reach age 72 (age 70-½ if you attained age 70-½ before 2020), regardless of whether you actually need the money.  So you lose the tax-deferred growth on the money you have to withdraw.

With Roth IRAs, they don’t have RMDs during your lifetime, so your money can stay in the account and keep growing tax-deferred.

Build Back Better Act

While on hold for now, the Build Back Better Act proposes limiting Roth conversions for high-income individuals.  If the Act is passed in its present form, effective January 1, 2032, the Act would prohibit converting pre-tax IRA and 401(k) plan funds to Roth savings for the following high-income individuals. (Income limits would be indexed for inflation).

  • Single filers with modified adjusted gross income (MAGI) over $400,000
  • Joint filers with MAGI over $450,000
  • Heads of households with MAGI over $425,000

While the proposed Act allows everyone access to Roth conversions for the next ten years, depending on the amount of assets that someone wants to convert, it may take this long to implement a tax-efficient conversion strategy.


Deciding when a Roth conversion makes sense hinges on issues like your tax rate now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate.  And remember, the conversion will be permanent.  You can’t revert the money back to a traditional IRA.

At Connections Financial Advisors, we can help you understand the Roth conversion rules, and help you determine if and when a Roth conversion makes sense for you.  To schedule a free, no-obligation meeting, call us at (217) 605-8130, send us an e-mail, or use our online calendar to schedule an appointment.  We look forward to helping you plan for your financial future.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion.  These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.  In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor. 

This is a hypothetical example and is not representative of any specific situation.  Your results will vary.  The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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