Roth Conversions Explained: 5 Reasons to Convert (and 4 Reasons Not To)

Could a Roth account be the most underused tool in your retirement plan? Roth IRAs grow tax-free, come out tax-free, and unlike traditional IRAs never force you to take withdrawals during your lifetime. But the real power is in the timing: knowing when to contribute, when to convert, and when to leave your pre-tax dollars right where they are. Let's break down how Roth IRAs work, then walk through 5 reasons a Roth conversion might make sense, plus 4 reasons it might not.

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A Roth conversion opens a narrow window, usually the gap years after you retire but before Social Security and RMDs begin, to move pre-tax savings into tax-free Roth dollars.

Roth IRA Basics

A Roth IRA is funded with after-tax dollars. You get no deduction today, but your investments grow tax-free, and assuming you're 59½ or older and the account has been open at least five years your withdrawals come out completely tax-free. Roth IRAs also carry no Required Minimum Distributions (RMDs) during your lifetime, which gives you far more control over your taxable income each year in retirement.

Anyone with earned income can contribute, but high earners face limits. For 2026, your ability to contribute directly begins to phase out once your Modified Adjusted Gross Income (MAGI) reaches $153,000 (single) or $242,000 (married filing jointly). The 2026 contribution limit is $7,500, or $8,600 if you're age 50 or older.

The Backdoor Roth Workaround

Earn too much to contribute directly? There's a perfectly legal loophole called the backdoor Roth. If you have no pre-tax money sitting in traditional IRAs: for example, all of your pre-tax savings live in a 401(k) or 403(b) you can:

1. Contribute after-tax dollars to a traditional IRA, then

2. Immediately convert that money into a Roth IRA.

You'll report the move on Form 8606 so the IRS knows the conversion isn't taxable. Because the "pro-rata rule" can create a surprise tax bill if you hold other pre-tax IRA money, check with your CPA before you pull the trigger.

What Is a Roth Conversion?

A conversion is different from a contribution. You take existing pre-tax IRA or 401(k) dollars and move them into a Roth. You pay ordinary income tax on the converted amount this year, but every dollar of future growth comes out tax-free later. There's no limit on how much you can convert, which is exactly why the timing of a conversion is one of the most powerful levers in retirement tax planning.

5 Reasons to Consider a Roth Conversion

1. You expect a higher tax bracket later. The sweet spot is often the gap after you retire but before Social Security and RMDs begin. If you're living off taxable savings during those years, your income and your tax rate may hit an all-time low, creating a golden window to convert at rock-bottom rates.

2. To sidestep future RMDs. At age 73 (rising to 75 in 2033), the IRS forces withdrawals from your traditional accounts whether you need the money or not. Large RMDs can push you into a higher bracket. Roth IRAs have no lifetime RMDs, so converting now can shrink that future tax bomb.

3. Tax diversification. A Roth bucket lets you choose which account to tap each year. That flexibility can help you stay under key income thresholds like the ones that trigger Medicare (IRMAA) surcharges, tax on up to 85% of your Social Security, or the 3.8% net investment income surtax ($250,000 joint / $200,000 single).

4. Estate planning. Non-spouse heirs generally must drain an inherited traditional IRA within 10 years often during their own peak earning years. An inherited Roth must also be emptied in 10 years, but those withdrawals are tax-free to your beneficiaries.

5. The market is down. A downturn lets you convert more shares at lower prices. When the market recovers, that rebound growth happens inside the Roth completely tax-free. You can also cherry-pick which holdings to convert in a partial conversion.

4 Reasons a Roth Conversion Might Not Make Sense

1. You'll be in a lower bracket later. If your future tax rate will be lower, or your IRAs are small enough that RMDs won't move the needle, converting now may just prepay tax you could have avoided.

2. You can't cover the tax with outside cash. Ideally you pay the conversion tax from after-tax savings, not from the IRA itself. If you don't have enough cash to pay the tax and live on, a conversion often doesn't pencil out.

3. You plan to give through QCDs. Starting at age 70½, a Qualified Charitable Distribution (QCD) lets you send up to $111,000 (2026) straight from your IRA to charity, tax-free satisfying your RMD without raising your income. If you're already charitably minded, QCDs may make conversions unnecessary.

4. You rely on income-based healthcare subsidies. Before Medicare, many early retirees lean on Affordable Care Act subsidies tied to income. A conversion inflates your income for the year and could shrink or wipe out those subsidies.

Summary

Roth accounts are one of the few places in the tax code where growth can be truly tax-free for life. But whether and how much to convert depends on your current and future brackets, the size of your accounts, your charitable goals, and how much cash you have on hand to pay the tax. It's a decision worth modeling carefully, ideally with planning software or a fiduciary advisor, before you write that check to the IRS.

Next Steps for Your Retirement

Ready to take the next step? I'd love to help you build a retirement plan, investment plan, and tax strategy.

Visit us at CapitalWealthGroupSC.com to see how we work with the 50+ crowd. If you're ready to dive into your numbers, you can schedule a 30-minute Introductory Call right here.

Let's make sure you're on the right track for the retirement you want.

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Full Transcript Here

Welcome to the Retirement Guide Podcast. I'm your host, George Jameson, the owner of Capital Wealth Group, a fee-only advisory firm. Whether you're nearing retirement or already retired, join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

So let's get started. Today we're breaking down the ins and outs of Roth IRAs, also called Roth Individual Retirement Accounts. We're going to start with the basics of Roths, talk about backdoor Roth contributions and Roth conversions. And then we'll explore several reasons why you may and several reasons why you may not want to do Roth conversions in retirement.

So the basics of Roth IRAs. Roth IRAs in general are great retirement savings accounts. They are funded with after-tax dollars, but the investments grow tax-free. And in general, assuming you're age 59 and over, the withdrawals are also completely tax-free. In addition, Roths don't have required minimum distributions, also called RMDs, which gives you more control over your taxable income during retirement.

So who can contribute to a Roth IRA? Basically, anyone with earned income can now contribute to a Roth IRA. However, if your modified adjusted gross income, also called MAGI, equals or exceeds $138,000 if you're single, or $218,000 if you're married filing jointly, you cannot contribute directly to a Roth IRA. But there is a workaround. If you don't have any assets in traditional IRAs—for example, if all of your pre-tax assets are in 401Ks or 403Bs, or if you roll over all of your IRA assets to a 401K—there is a loophole called a backdoor Roth IRA contribution.

So how do you do a backdoor Roth IRA contribution? Well, it's quite easy. First, open a Roth IRA, and then open a traditional IRA at a custodian like a Schwab or Fidelity. And then contribute after-tax money to your new traditional IRA first. And then immediately transfer the after-tax money in your traditional IRA to your new Roth IRA. And that's basically all you have to do. But you also need to report this on your tax return. You should receive two 5498s and a 1099R, and then you must also file Form 8606. This reports to the IRS that the traditional IRA contribution you made was not a deductible contribution, and the conversion from your traditional IRA to your Roth IRA is not a taxable event. Please check with your CPA or tax advisor to make sure you follow the proper steps and that you report it correctly to the IRS.

The max Roth IRA contribution for 2023 is $6,500 or $7,500 if you're age 50 or above.

So next we're going to talk about Roth conversions. But first, don't get Roth contributions and backdoor Roth contributions confused with Roth conversions. So what is a Roth conversion? A Roth conversion is where you take pre-tax IRA or 401k funds and convert them into Roth IRA, after-tax funds. You must pay income tax on any converted funds in the year of the conversion. So if you decide to do a Roth conversion, it's obviously best to do it when you have a relatively low tax bracket. There is no limit on the amount you can convert and all the gains on the funds going forward will never be taxed.

Now, let's look at several reasons why you may want to do Roth conversions.

Number one, you believe your tax bracket will be higher in retirement, especially when RMDs kick in. In most cases, it's not easy to change your tax bracket while you're working. But with careful planning, there is a specific timeframe that opens up after you retire and before social security and required minimum distributions kick in. During this period, you might have a chance to lower your tax bracket and consider a Roth IRA conversion. If you have been preparing for this scenario by setting up an after-tax investment account, you can tap into it at the start of your retirement before you begin receiving social security benefits or RMDs kick in. By using the funds from your after-tax account to cover your living expenses for the initial years of retirement, you can keep your taxable income low. This presents an ideal opportunity to consider Roth IRA conversions.

And number two, Roth IRAs have no required minimum distributions. RMDs are now mandatory at age 73 from traditional IRAs and 401Ks if you're no longer working. Even if the funds are not needed, they must be withdrawn and will be taxed. This may push you into a higher tax bracket, especially if you have larger IRAs and 401ks. If the IRA is not needed for retirement expenses, you may assume that waiting to make withdrawals is the best strategy, since it delays any taxes that are due. However, this may also result in higher RMDs and therefore higher taxes due. Roth IRAs do not have RMDs, which protects against these potential pitfalls.

And number three, tax diversification with a Roth IRA. A Roth IRA can be beneficial for tax diversification. That way you can look at your tax position each year and determine which account would be best to withdraw money from if needed. For instance, there are extra charges added to Medicare premiums when income exceeds certain levels. If you found your taxable income nearing one of these levels, yet you still need money to meet the expenses, pulling the money from a Roth IRA could be a solution. You'll receive your funds, meet your expenses, and avoid the higher Medicare premiums. Another common situation that is impacted by income levels is tax due on Social Security income. As your taxable income increases above certain limits, more of your social security becomes subject to tax up to 85%. Large IRA withdrawals could also result in your income reaching a level where you are impacted by the 3.8% Medicare surtax on investment income. For joint filers, the AGI threshold is $250,000, and I believe it's $200,000 for single. Tax diversification is a solution to these problems. By having the Roth IRA, you could avoid crossing the thresholds where these other taxes start.

And number four, estate planning. Roth IRA income is not taxable for your beneficiaries. If you want to maximize your estate for your heirs, Roth conversions can make sense. Non-spousal beneficiaries now must liquidate your entire traditional IRA and 401k within 10 years of death. With less of a window, these larger withdrawals increase the odds of pushing beneficiaries into higher tax brackets. While Roth IRA would still need to be withdrawn in 10 years, the income is not taxable to your beneficiaries.

And number five, the market is down. When the stock market is down, it may be a good time to do a Roth conversion. You will be able to convert more shares at the lower price and have the potential future gain to be tax-free, as it will now be in the Roth IRA. In addition, you can also identify which shares you want to convert if you are doing a partial conversion, selecting the stocks or funds that you think had the most growth potential.

As you can see, there are many reasons to consider Roth conversions. One important rule to note, though, is that each conversion has its own five-year window where you cannot withdraw those funds without a 10% penalty. But if the funds are not needed, the benefits of a conversion can be appealing.

Now several reasons why you may not want to do a Roth conversion.

Number one, lower future tax bracket. Of course, if your tax bracket will be lower in the future, it probably does not make sense to do a conversion. If you have relatively small IRAs and 401k accounts, then your RMDs may not increase your tax enough to justify Roth conversions.

And number two, limited after-tax funds. If you lack sufficient after-tax savings to maintain a low tax bracket at the start of your retirement while performing the conversions, it may not make sense. Also in general, you will want to pay the taxes on the conversions with cash or after-tax funds. If you don't have enough after-tax savings to pay the taxes and live on, it may not make sense.

And number three, qualified charitable distributions, also called QCDs. You can start QCDs at age 70 and a half. QCDs allow you to gift $100,000 per year and pay zero taxes. If you plan to do QCDs and gift your RMDs to charity, your tax bracket will most likely not go up due to RMDs. So doing Roth conversions may not make sense for you.

Number four, healthcare subsidies. Some retirees rely on healthcare subsidies tied to their income levels, especially at the beginning of retirement before they are eligible for Medicare. Converting to a Roth could artificially inflate your income for the year, potentially impacting your eligibility for these valuable subsidies.

The decision whether to convert to a Roth IRA or not and how much to convert is not always easy. We use sophisticated retirement planning software to determine what the potential tax savings may be. However, even with using planning software, you have to be careful with the assumptions you use. If you are too optimistic regarding the growth of your Roth, the tax savings may be exaggerated.

Overall, converting to a Roth IRA might give you greater flexibility in managing RMDs and can potentially cut your tax bill in retirement. But trying to figure out if you should do a conversion, and if so, how much you should convert, can be complex. You can do it on your own, but it may be worthwhile to at least consult a qualified financial planner or CPA before you make the move.

That wraps it up for today, and next week I'm going to talk about how advisors are paid, so stay tuned and subscribe. Thanks and have a great day.

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe and leave a five-star review to help others discover the show. For questions, ideas, or to discuss your retirement plan, reach out to me, George Jameson, at Capital Wealth Group. If you'd like a free retirement review, visit our website at CapitalWealthGroupSC.com to learn more. Thank you for listening. Stay tuned for more insightful retirement planning in future episodes.

And now for the disclaimer: The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day.