A Roth IRA conversion is a shift of pre-tax IRA or 401(k) money to a Roth IRA or Roth 401(k). The main benefit is that the money grows tax-free once inside the Roth. The cost of the conversion is that the pre-tax amount moved becomes taxable income in the current year. It will take time to recover from the initial tax bill, but the savings over time can be substantial.
The best way to identify opportunities is to look ahead for changes in your tax bracket. Any lower income years may be good for intentionally taking on more income (such as a Roth conversion) and higher income years should be planned around by taking losses, deductions or deferring income. The idea is to pay taxes when the rate is low, and then enjoy tax-free growth on any appreciation once inside the Roth IRA. Would you pay 12% now to avoid 24% later?
Let’s look at an example of a couple that files Married Filing Jointly (MFJ) in 2025:
As you can see from this example, years 3 and 4 (when they are ages 65 and 66) might be the best ones for Roth IRA Conversions. They may have a limited number of years in a lower tax bracket to take advantage! They could convert $36,950 ($96,950 less $60,000) at a rate of 12%, and another $109,750 ($206,700 less $96,950) at a rate of 22%. Once spouse 1's pension starts, they may never get back to these lower tax brackets again!
It's important to keep in mind that you will pay ordinary income tax on the converted amounts, so it's not free! The good news is that it is not all or nothing, and you can choose whatever amount(s), if any, you feel comfortable with converting on a year-to-year basis. You might choose to spread out conversions over multiple years to better manage the associated tax bills. This planning and analysis is one of the values of working with a financial advisor that incorporates income tax planning as part of their services. A good place to start may be to see how much room you have left in your current tax bracket, before you 'spill over' into the next highest bracket.
A few other items to note:
- If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. Also, if your traditional IRA includes both pre-tax and after-tax contributions, the converted amount will be partially taxable (called the pro-rata rule), so you may want to consult with a tax expert in advance. Each conversion will be subject to a separate 5-year holding period rule and once a conversion is done, it can't be undone.
- If you are of Required Minimum Distribution (RMD) age and want to convert a traditional IRA to a Roth IRA, you must take your annual RMD before doing any conversions for the year. And if you own multiple traditional IRAs, your total RMD for all of the accounts must be satisfied before doing a conversion from any of your traditional IRAs.
- Once RMDs start, your IRA accounts are going to become taxable income anyway, so why not make some of the growth tax-free, instead of leaving your entire IRA and all of the growth it will have become taxable?
As you can see it is important to be aware of potential windows of opportunity and all the details in order to take full advantage. Remember, saving money by paying less in taxes has the effect of compounding, giving you more to invest!
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