Topic 10 · 5 min read
Roth Conversion Basics
Pay tax now on purpose, so growth is never taxed again.
A Roth conversion moves money from a traditional retirement account into a Roth account. You add the converted amount to this year's income and pay tax on it, and in exchange the money and all its future growth can come out tax free later.
What to know
- It is a voluntary tax event
- Nothing forces a conversion. You choose the year and the amount, which makes it a planning tool rather than a transaction.
- Low-income years are the opening
- A gap year, a business loss, an early retirement before Social Security begins — these are when conversions cost the least.
- Fill the bracket, do not blow past it
- Convert only enough to reach the top of your current bracket rather than pushing income into the next one.
- Pay the tax from outside
- Using taxable savings for the tax bill keeps the full converted amount growing inside the Roth.
- No more do-overs
- Recharacterizing a conversion was eliminated, so a conversion is permanent once the year closes.
The tax benefit
Future growth and withdrawals become tax free, required minimum distributions on that money disappear, and heirs inherit a tax-free account.
Worked example
The gap year
Someone between jobs with $20,000 of income converts $30,000 from a traditional IRA. The conversion is taxed at low rates, and decades of growth on that $30,000 are never taxed again.
Watch out for
- Extra income can raise Medicare premiums and reduce income-based credits.
- Each conversion starts its own five-year clock for penalty-free access.
- If you must use the IRA itself to pay the tax, the math usually stops working.
Terms from this topic
Roth conversionMarginal bracketFive-year ruleRequired minimum distribution
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