Are you sitting on a traditional IRA and wondering if now’s the right time to convert it to a Roth? This question plagues many retirement savers, and for good reason – it’s a decision that can have major tax implications both now and down the road. While 2021 was once considered an opportune time due to the pandemic and low tax rates, the landscape in 2025 has its own unique considerations.
I’ve helped dozens of clients navigate this decision, and I can tell you it’s never a simple yes or no answer Let’s dig into what you need to know before making this potentially significant financial move.
Understanding the Difference: Traditional IRA vs. Roth IRA
Before we jump into whether you should convert, let’s make sure we’re clear on the fundamental differences between these two retirement accounts
Traditional IRA
- Contributions: May be wholly or partially tax-deductible
- Growth: Tax-deferred (you don’t pay taxes until withdrawal)
- Distributions: Taxed as ordinary income when withdrawn
- Required Minimum Distributions (RMDs): Must begin taking distributions at a certain age
Roth IRA
- Contributions: Made with after-tax money (no tax deduction)
- Growth: Tax-free
- Distributions: Qualified distributions are completely tax-free
- Required Minimum Distributions: No RMDs for original account owners
The primary advantage of a traditional IRA is the potential upfront tax deduction, while the Roth IRA’s main benefit is tax-free withdrawals in retirement. This distinction is critical to understanding whether a conversion makes sense for you.
Nine Key Factors to Consider Before Converting
1. Present vs. Future Tax Rates
This is probably THE most important factor in your decision. When you convert from a traditional IRA to a Roth, you’re basically agreeing to pay taxes now instead of later
If your tax rate in retirement will likely be higher than your current tax rate, a Roth conversion could make sense. But if you expect to be in a lower tax bracket in retirement (which many people are), the conversion might not be worth it.
Keep in mind that laws can change the federal income tax rates. Some parts of the Tax Cuts and Jobs Act will soon be gone, which could change future tax rates.
2. Your Time Horizon Until Retirement
For the most part, a Roth conversion makes more sense if you have more time until retirement. This gives the money you’re converting more time to grow tax-free, which might make up for the tax hit you’ll take right away.
As a general rule, if you’re approaching retirement or will need your IRA money to live on soon, converting to a Roth often doesn’t make financial sense. You need time to recoup the tax cost.
3. Ability to Pay the Conversion Tax
A lot of people get this wrong: when you convert, you’ll have to pay income tax on the amount you changed. Are you able to pay this tax bill with cash that is NOT in a retirement account?
Important tip: Never use funds from your IRA to pay the tax on the conversion! This reduces your retirement savings and could trigger additional taxes or penalties.
A conversion will always come with a tax bill. The more you convert and the higher your tax bracket, the bigger this bill will be. If you don’t have enough non-retirement funds to cover this tax, a conversion might not be wise.
4. Flexibility of Roth IRAs
Roth IRAs offer more flexibility than traditional IRAs in several ways:
- You can withdraw your contributions at any time without taxes or penalties
- No required minimum distributions (RMDs) during your lifetime
- Tax-free distributions to heirs (though they’ll still need to follow the 10-year cleanout rule)
5. Medicare Premium Considerations
A lot of people forget about this one: if you’re already on Medicare or will soon be, the extra money from a Roth conversion could mean higher Medicare premiums.
Medicare participants with modified adjusted gross incomes over certain thresholds pay surcharges on their Parts B and D coverage. A large conversion could push you over these thresholds.
6. Current Value of Your IRA Investments
The timing of market conditions can impact the wisdom of a conversion. Converting when your investments are temporarily depressed in value means you’ll pay less tax on the conversion. If those investments then recover after the conversion, you’ll have effectively converted more for less tax.
On the flip side, if you convert when markets are at their peak, you might end up paying tax on inflated values that could decline later.
7. Consider Partial Conversions
You don’t have to convert your entire traditional IRA in one go. Many savvy investors use a strategy of partial conversions over multiple years to spread out the tax impact.
This approach can help you avoid bumping into a higher tax bracket and gives you more flexibility. It’s often more effective than an all-or-nothing approach.
8. No Going Back: The Elimination of Recharacterizations
Prior to 2018, if you converted to a Roth and then regretted your decision, you could undo or “recharacterize” the conversion. That option no longer exists.
This means your decision is permanent, which makes it even more important to carefully consider all factors before converting. If markets tumble right after you convert, you’re still stuck with the tax bill based on the higher value.
9. Estate Planning Considerations
If you don’t need your IRA money and plan to leave it to heirs, a Roth conversion might be advantageous from an estate planning perspective.
Your heirs won’t owe income tax on distributions from an inherited Roth IRA (though they will need to fully withdraw the funds within 10 years if they’re not eligible for an exception to this rule).
When a Roth Conversion Makes the Most Sense
After working with lots of different clients, I’ve seen Roth conversions work best in these situations:
- You expect to be in a higher tax bracket in retirement
- You have a long time horizon before needing the funds
- You have sufficient cash outside your IRA to pay the conversion tax
- Your IRA investments are currently depressed in value
- You want to leave tax-free assets to heirs
- You want to avoid RMDs during your lifetime
- You desire more flexibility with your retirement funds
When to Think Twice About Converting
On the other hand, a Roth conversion probably isn’t right for you if:
- You expect to be in a significantly lower tax bracket in retirement
- You don’t have cash available to pay the conversion tax
- You’ll need the money within 5 years of converting
- You plan to leave your IRA to charity (charities don’t pay income tax anyway)
- Your heirs will likely be in lower tax brackets than you
- You’re already in or near retirement
The Bottom Line: It’s About Your Specific Situation
The decision to convert a traditional IRA to a Roth isn’t one-size-fits-all. It requires careful analysis of your unique financial circumstances, retirement timeline, tax situation, and goals.
For some, the upfront tax hit of conversion will be worth the long-term benefits. For others, sticking with a traditional IRA makes more financial sense.
If you’re seriously considering a conversion, I strongly recommend consulting with a qualified tax advisor or financial planner who can analyze your specific situation. They can help you run the numbers and determine if a conversion—full or partial—aligns with your financial goals.
Remember, once you convert, there’s no going back, so make sure you’re confident in your decision before taking the plunge.
Final Thoughts
Converting your traditional IRA to a Roth is a significant financial decision that should be made with careful consideration of your overall retirement strategy. While the prospect of tax-free withdrawals in retirement is appealing, the immediate tax implications can be substantial.
We’ve worked with many clients who’ve benefited greatly from conversions, and others for whom it simply didn’t make sense. The right choice depends on your individual circumstances.
What’s your retirement timeline looking like? Are you expecting higher or lower income in retirement? Do you have funds available to pay the conversion tax? These are the questions you’ll need to answer before moving forward.
Have you considered a Roth conversion before? What factors are most important in your decision? I’d love to hear your thoughts!
What is a Roth conversion?
A Roth conversion is a process where you move funds from a pre-tax retirement account, like a traditional IRA, 401(k), or similar account, into a Roth IRA. This means that you have to pay taxes on the amount that was converted in the year that it was converted. However, once the money is in the Roth IRA, it can grow tax-free and be taken out tax-free when you retire. This strategy can be particularly beneficial if you expect your tax rate to be higher in the future. However, its important to consider your current and future financial situation, as well as the potential tax implications, before making a decision.
Who is able to convert to a Roth IRA?
Anyone with a traditional IRA, regardless of their income, can perform a traditional IRA to Roth IRA conversion. Additionally, people who have a 401(k), 403(b), SEP, or SIMPLE IRA may also convert these funds to a Roth IRA, assuming they meet specific criteria.
Convert Your 2021 IRA Funds to a Roth Account Before It’s Too Late!
FAQ
When should you not do a Roth conversion?
Who should not consider converting to a Roth IRA?You’re nearing—or in—retirement and need your traditional IRA to cover your living expenses. You’re currently receiving Social Security or Medicare benefits. You don’t have money to pay the conversion tax or must sell assets that could lead to an additional tax hit.
Is it smart to convert an IRA to a Roth IRA?
If you plan to retire soon and start taking money out of your IRA, you probably wouldn’t change it from a traditional IRA to a Roth IRA. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.
At what age is too late to convert an IRA to Roth?
There is no age limit for performing a Roth conversion; you can convert a traditional IRA to a Roth IRA at any age, regardless of your income.
What is the break even point for a Roth conversion?
The break-even point for a Roth conversion is when the future tax savings from having a Roth IRA offset the upfront tax cost of the conversion. It is determined by comparing the tax-adjusted value of a converted Roth account to that of the traditional account over time, considering future tax rates, your life expectancy, and whether taxes were paid from other funds.
Can you convert a traditional IRA to a Roth IRA?
Partial Conversions There is nothing in the tax law that requires you to convert all of the funds in your traditional IRA to a Roth IRA at one time. You can convert to a Roth account in small amounts over time to spread out the tax hit.
What happens if you convert a Roth IRA?
The 2017 Tax Cuts and Jobs Act ended recharacterizations of Roth conversions. If you do a Roth conversion, you will still have to pay the tax bill from the first year, even if the value of your Roth IRA assets drops soon after the conversion. This first appeared in The Kiplinger Tax Letter.
What is a Roth IRA conversion?
A Roth IRA conversion involves moving assets from other retirement plans into your Roth IRA. Learn how to convert a Roth IRA and whether it’s right for you. Does it ever make sense to pay taxes on retirement savings sooner rather than later? When it comes to a Roth individual retirement account (IRA), the answer could be yes.
Should you consider a Roth conversion this year or next?
There are several reasons to consider a Roth conversion this year or next. First, researching and preparing for a potential conversion now could mean you’re well-positioned to act if volatility were to return to the stock market. That’s because converting when stock prices are lower can help to lower the tax bill on converted pre-tax amounts.
Are Roth IRA conversions taxable?
Keep state taxes in mind too. A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will generally be treated as taxable income by your state as well as by the federal government.
Is a Roth conversion a good investment?
A Roth conversion works best for those who believe their tax rates will be higher in retirement than they are now. A Roth conversion is the best retirement account to own since the funds grow income tax free for the rest of your life. The only question is, “How much are you willing to pay in taxes now to get it?”