When to Convert to Roth IRA (and When Not To)

Roth IRA conversions represent one of the most powerful—and most misunderstood—strategies in retirement planning. By converting funds from a traditional IRA to a Roth IRA, you voluntarily pay income taxes now on the converted amount in exchange for decades of tax-free growth and tax-free withdrawals in retirement. When executed correctly during opportune windows, conversions can save hundreds of thousands of dollars in lifetime taxes. When executed poorly or at the wrong time, they can result in paying unnecessarily high taxes and reducing your after-tax wealth.

The challenge is that conversion decisions require balancing multiple factors: your current tax bracket, expected future brackets, retirement timeline, estate planning goals, available funds to pay conversion taxes, and broader financial context. What makes perfect sense for a 60-year-old who just retired with $800,000 in a traditional IRA might be completely wrong for a 45-year-old at peak earnings with the same balance. The timing of conversions—not just whether to convert—often determines whether the strategy succeeds or fails.

This comprehensive guide explores when Roth IRA conversions make sense, when they should be avoided, how to identify optimal conversion windows, strategies for executing multi-year conversion plans, common mistakes to avoid, and detailed examples showing conversions in action. Whether you have a large traditional IRA balance you're considering converting, you're planning for early retirement and want to optimize your tax strategy, or you're simply trying to understand if conversions belong in your financial plan, this guide will help you make informed decisions about one of retirement planning's most valuable tools.

What Is a Roth IRA Conversion?

The Basic Mechanism

A Roth IRA conversion is the process of moving money from a traditional IRA (or traditional 401(k)) into a Roth IRA:

• You instruct your financial institution to transfer funds from traditional to Roth
• The converted amount is added to your taxable income for the year
• You pay income tax on the conversion amount at your ordinary income tax rate
• Once in the Roth IRA, the funds grow tax-free forever
• Future qualified withdrawals from the Roth IRA are completely tax-free

Key Characteristics

No income limits: Unlike Roth IRA contributions, there are no income limits for conversions. Anyone can convert regardless of income.

No contribution limits: You can convert any amount in a single year (though tax considerations usually suggest spreading conversions over multiple years).

Immediate tax liability: The conversion creates taxable income in the year you convert, which you must pay with your tax return.

Five-year rule: Converted amounts must remain in the Roth IRA for 5 years (or until age 59½, whichever comes first) to avoid the 10% early withdrawal penalty on the converted amount.

Irreversible: Since 2018, conversions cannot be "recharacterized" (undone). Once you convert, the decision is permanent.

Simple Example

You have $100,000 in a traditional IRA. You convert $50,000 to a Roth IRA. That $50,000 is added to your taxable income for the year. If you're in the 22% bracket, you'll owe $11,000 in additional federal income tax (plus state tax if applicable). In exchange, that $50,000 now grows tax-free in your Roth IRA, and all future withdrawals are tax-free.

The Core Logic: When Conversions Make Sense

Roth conversions are fundamentally a tax arbitrage strategy. They make sense when:

Condition 1: Current Tax Rate < Future Tax Rate

If you'll pay less tax now than you would pay later, conversions save money.

Example:

• Currently retired, in 12% bracket
• When RMDs begin at 73, you'll be in 22% bracket
• Converting now at 12% saves 10 percentage points vs. future withdrawals

Condition 2: Time for Tax-Free Growth

The longer the converted funds have to grow tax-free, the more valuable the conversion.

Example:

• Convert $100,000 at age 60
• It grows to $220,000 by age 80 (4% real return)
• That $120,000 in growth is tax-free in Roth vs. taxable in traditional

Condition 3: Estate Planning Goals

If you plan to leave wealth to heirs, Roth conversions create dramatically better inheritance outcomes.

Why: Heirs inherit Roth IRAs tax-free, while they pay income tax on traditional IRA withdrawals. With the 10-year distribution rule, this difference can be massive.

Condition 4: Funds Available to Pay Taxes

Conversions work best when you can pay the tax from non-IRA funds, preserving the full converted amount to grow tax-free.

Optimal: Pay $11,000 tax from savings to convert $50,000 (full $50,000 grows tax-free)

Suboptimal: Withhold $11,000 from the $50,000 conversion to pay tax (only $39,000 grows tax-free, plus the $11,000 withheld is treated as a distribution and taxed/penalized if under 59½)

Ideal Conversion Windows: The Best Times to Convert

Window 1: Early Retirement (Before RMDs and Social Security)

Ages 60-70 (or whenever you retire until RMDs begin)

This is often called the "golden window" for Roth conversions. Here's why it's ideal:

• Low income: No employment income, possibly delaying Social Security
• Low tax bracket: May be in 12% or 22% bracket despite having significant assets
• Time before RMDs: Can convert at your own pace before forced distributions begin
• Long enough to benefit: Still have 20-30+ years for tax-free growth

Example strategy:

1. Retire at 62 with $800,000 traditional IRA
2. Live off Roth contributions and taxable investments for 10 years
3. Convert $70,000/year from traditional to Roth (stay in 12-22% brackets)
4. By age 72, converted $700,000 at low rates
5. Remaining $100,000+ generates minimal RMDs

Tax savings: Converting at 12-22% vs. future 24-32% brackets = $84,000-$140,000 saved

Window 2: Low-Income Year During Working Career

Job loss, sabbatical, career change, business loss

Any year where your income temporarily drops creates a conversion opportunity:

• Lower bracket: Partial year employment means more conversion capacity in lower brackets
• Long time horizon: If you're younger, decades of tax-free growth ahead
• One-time opportunity: May not repeat once income stabilizes

Example:

• Age 48, laid off in March
• Only $25,000 income for the year (3 months work + severance)
• Usually in 24% bracket, but this year can convert up to ~$70,000 and stay in 12% bracket
• Convert $45,000 from traditional to Roth
• Pay 12% tax now instead of 24%+ later

Window 3: After Major Life Change

Retirement, relocating to lower-tax state, business sale

Major life transitions often create conversion opportunities:

• State relocation: Move from high-tax state (CA, NY, NJ) to no-tax state (FL, TX, NV) before converting
• Business sale: Sell business, triggering one high-income year, then convert in subsequent low-income years
• Divorce settlement: May receive traditional IRA in settlement; convert before income rebounds

State move example:

• Retire in California (13.3% state tax)
• Move to Nevada (0% state tax)
• Convert $200,000 from traditional to Roth over 3 years in Nevada
• Save 13.3% × $200,000 = $26,600 in state taxes vs. converting while in CA

Window 4: Market Downturn

When your IRA balance has temporarily declined

Market downturns create unique conversion advantages:

• Lower conversion amount: Same number of shares, less taxable income
• Recovery in Roth: Market rebound happens tax-free in Roth IRA
• Smaller tax bill: Pay tax on temporarily depressed value

Example:

• Traditional IRA typically worth $500,000
• Market drops 25%, now worth $375,000
• Convert $100,000 (instead of waiting and converting same dollar amount when market is at $500,000)
• Pay tax on $100,000 now
• Market recovers to $500,000+ in Roth (all growth is tax-free)

Window 5: Before Required Minimum Distributions Begin

Ages 70-73 (before RMDs start)

The year or two before RMDs begin is a critical window:

• Last chance before forced distributions: Once RMDs start, your taxable income floor increases
• Reduce future RMD amounts: Converting now shrinks traditional IRA balance, leading to smaller RMDs
• Still have time for growth: Even at 72, you have 15-20+ years of potential tax-free compounding

When NOT to Convert: Red Flags and Bad Timing

Red Flag 1: Peak Earning Years at High Tax Brackets

Don't convert when:

• You're in your 40s-50s earning peak income
• You're in the 32%, 35%, or 37% tax bracket
• You expect to be in lower brackets in retirement

Why avoid: You'd pay 32-37% tax now to convert, only to withdraw at 12-24% later. This is backwards arbitrage—you lose money.

Exception: If you're already in the 37% bracket and expect to stay there in retirement (very wealthy, substantial pension income), conversions might still make sense for estate planning.

Red Flag 2: Can't Pay Tax From Non-IRA Funds

Don't convert when:

• You'd need to withdraw from the IRA itself to pay the conversion tax
• You'd need to go into debt to pay the tax
• Paying the tax would deplete your emergency fund

Why avoid: Withholding tax from the conversion defeats much of the purpose. If you convert $50,000 but withhold $11,000 for taxes, you only get $39,000 growing tax-free. Worse, if you're under 59½, that $11,000 withholding is treated as a taxable distribution and subject to 10% penalty.

Red Flag 3: Near Retirement With No Conversion Plan

Don't convert when:

• You're 1-2 years from retirement
• Still earning high income
• Haven't thought through a multi-year conversion strategy

Why avoid: Converting large amounts at high tax rates just before retirement is inefficient. Wait until you retire and your income drops, then convert over multiple years at lower rates.

Red Flag 4: Immediate Need for the Funds

Don't convert when:

• You'll need to withdraw the converted funds within 5 years
• You're under 59½ and might need access soon

Why avoid: Converted amounts are subject to a 5-year waiting period before they can be withdrawn penalty-free (if under 59½). If you need the money soon, don't convert—just withdraw from traditional IRA directly.

Red Flag 5: Medicare Cliffs (Ages 63-64)

Be cautious when:

• You're 63-64 years old (2 years before Medicare eligibility)
• Large conversion would push income above $103,000 (single) or $206,000 (married)

Why be cautious: Income in these years determines Medicare Part B and D premiums (IRMAA surcharges) two years later. A large conversion at 63 could trigger higher Medicare premiums at 65-66.

Solution: Either convert smaller amounts to stay below IRMAA thresholds, or wait until 65+ when income only affects next year's premiums.

Red Flag 6: Expecting Large Inheritance or Windfall

Don't convert when:

• You expect to inherit significant wealth soon
• That inheritance will push you into higher brackets

Why avoid: The expected inheritance will increase your retirement income and tax bracket. Converting now at "low" rates might not be low compared to your actual future bracket.

Red Flag 7: Living in High-Tax State With No Plans to Move

Be cautious when:

• You live in a state with 8-13% income tax
• You'll stay in that state through retirement
• The high state tax makes conversions more expensive

Why be cautious: State taxes increase the cost of conversions. A conversion that makes sense at 22% federal might not make sense at 22% + 9% state = 31% total.

Solution: If you plan to move to a low/no-tax state in retirement, wait until after the move to convert.

How Much to Convert: Annual Conversion Strategies

Strategy 1: Fill the Bracket

Convert just enough to reach the top of your current tax bracket without spilling into the next bracket.

Example:

• Married filing jointly
• $50,000 in pension/Social Security income
• Top of 12% bracket: $94,300
• Room in 12% bracket: $94,300 - $50,000 = $44,300
• Convert $44,300 from traditional to Roth
• Pay 12% tax = $5,316
• Repeat annually

Advantage: Maximizes conversions at the lowest possible rate without jumping brackets.

Strategy 2: Convert to Top of Next Bracket

Accept going into the next bracket if the rate is still reasonable.

Example:

• Same situation as above
• Top of 22% bracket: $201,050
• Room in 12% + 22% brackets: $201,050 - $50,000 = $151,050
• Convert $80,000 (some at 12%, some at 22%)
• Average rate: ~18%
• Completes conversions faster

Advantage: Aggressive but still reasonable if you're confident future rates will be 24%+.

Strategy 3: Fixed Dollar Amount

Convert the same dollar amount each year regardless of bracket.

Example:

• Convert $50,000/year for 10 years
• Simple to execute and track
• Provides consistency

Advantage: Simplicity. Good if your situation is stable and you don't want to optimize annually.

Strategy 4: Convert Entire Balance

Convert the entire traditional IRA balance over a short period (1-3 years).

When appropriate:

• Traditional IRA balance is relatively small ($100,000 or less)
• You're in a temporary low-income period
• Estate planning is critical and you want to maximize tax-free inheritance

Example:

• $120,000 traditional IRA
• Retired, in 12% bracket
• Convert $40,000/year for 3 years
• Pay ~$4,800/year in tax
• Entire balance now in Roth by year 3

Multi-Year Conversion Plans: Case Studies

Case Study 1: Early Retirement Conversion Ladder

Profile: Age 60, just retired, $600,000 traditional IRA, $200,000 taxable investments, no income

Goal: Convert as much as possible at low rates before RMDs begin at 73

13-year conversion plan (ages 60-72):

Outcome:

• Converted entire traditional IRA balance plus growth
• Paid average 10.9% tax rate on conversions
• At RMD age, $0 in traditional IRA (no RMDs)
• All retirement income tax-free from Roth

Without conversions:

• Traditional IRA grows to ~$1.2 million by age 73
• RMDs of $45,000+/year starting at 73
• Combined with Social Security, pushed into 24% bracket
• Would pay ~$10,800/year in tax on RMDs alone
• Over 20 years: $216,000 in taxes vs. $83,000 with conversions
• Conversion saves: $133,000

Case Study 2: Job Loss Conversion Opportunity

Profile: Age 52, laid off mid-year, $300,000 traditional 401(k), usually earns $140,000

Current year income: $70,000 (half-year salary + severance)

Opportunity: Usually in 24% bracket, but this year has room in 12-22% brackets

Strategy:

1. Roll 401(k) to traditional IRA
2. Current income: $70,000 (in 22% bracket)
3. Top of 22% bracket: $201,050 (married filing jointly)
4. Room for conversion: $201,050 - $70,000 = $131,050
5. Convert $80,000 to stay comfortably in 22% bracket
6. Total income: $150,000
7. Tax on conversion: ~$17,600 (22% average)

Outcome:

• Converted $80,000 at 22% instead of future 24-32%
• Savings: 2-10 percentage points = $1,600-$8,000
• That $80,000 grows tax-free for 15+ years until retirement

Next year: Returns to $140,000 income, back in 24% bracket. The one-time conversion opportunity is gone, but he captured it.

Case Study 3: State Move Conversion Strategy

Profile: Age 64, retiring and moving from New Jersey (10.75% state tax) to Florida (0% state tax), $500,000 traditional IRA

Bad timing: Converting before the move

• Convert $100,000 while living in NJ
• Federal tax: 22% = $22,000
• NJ state tax: 10.75% = $10,750
• Total tax: $32,750 (32.75% effective rate)

Good timing: Converting after the move

• Move to Florida, establish residency
• Convert $100,000 as Florida resident
• Federal tax: 22% = $22,000
• Florida state tax: $0
• Total tax: $22,000 (22% effective rate)

Savings by waiting: $10,750 per $100,000 converted

Multi-year plan:

• Move to Florida at age 64
• Convert $70,000/year for 7 years (ages 64-70)
• Total conversions: $490,000
• State tax savings: $52,325

Common Conversion Mistakes and How to Avoid Them

Mistake 1: Converting Too Much at Once

Error: Converting $200,000 in one year, shooting from 12% to 32% bracket

Better approach: Convert $40,000-$50,000/year for 4-5 years, staying in 12-22% brackets

Tax savings: Spreading out saves 10-20 percentage points on most of the conversion

Mistake 2: Not Paying Tax From Outside Funds

Error: Converting $50,000 but withholding $11,000 for taxes, leaving only $39,000 in Roth

Better approach: Pay the $11,000 tax from savings or checking account, keeping full $50,000 in Roth to grow tax-free

Mistake 3: Ignoring State Tax Implications

Error: Focusing only on federal tax bracket, forgetting about 5-13% state tax

Better approach: Calculate total tax rate (federal + state), especially if moving to different state soon

Mistake 4: Converting Right Before Medicare

Error: Age 63, converting $200,000, pushing income to $250,000

Consequence: At age 65, Medicare premiums jump due to high income at 63 (2-year lookback)

Better approach: Convert smaller amounts at 63-64, or wait until 65+ when lookback is only 1 year

Mistake 5: Converting in Market Peak

Error: Converting when traditional IRA is at all-time high value

Better approach: Be patient and convert during market downturns when the same number of shares has lower taxable value

Mistake 6: Not Having a Multi-Year Plan

Error: Ad hoc conversions without considering optimal multi-year strategy

Better approach: Create 5-10 year conversion plan with target amounts, tax brackets, and milestones

Mistake 7: Forgetting Pro-Rata Rule

Error: Thinking you can convert only after-tax (non-deductible) contributions first

Reality: IRS pro-rata rule means conversions must include proportional amount of pre-tax and after-tax money

Example:

• $95,000 in traditional IRA (pre-tax)
• $5,000 after-tax contributions (non-deductible)
• Total: $100,000 (95% pre-tax, 5% after-tax)
• If you convert $10,000, 95% ($9,500) is taxable, only 5% ($500) is tax-free

Special Conversion Strategies

The Backdoor Roth IRA

For high earners above Roth IRA contribution income limits

Process:

1. Contribute $7,000 to non-deductible traditional IRA (no income limits)
2. Immediately convert to Roth IRA
3. Because contribution was non-deductible, little or no tax on conversion
4. Result: $7,000 in Roth IRA despite being above income limits

Caution: Pro-rata rule applies if you have other traditional IRA balances

The Roth Conversion Ladder (Early Retirement)

For people retiring before 59½ who need penalty-free access to funds

Process:

1. Convert $50,000 from traditional to Roth in Year 1
2. Wait 5 years
3. In Year 6, withdraw that $50,000 penalty-free (5-year rule satisfied)
4. Meanwhile, continue converting $50,000/year in Years 2-6
5. Creates a "ladder" of funds accessible every year without penalty

Use case: Retiring at 55, need to access retirement funds before 59½

In-Plan Roth Conversion (401(k) to Roth 401(k))

For employees with traditional 401(k) who want Roth treatment

Process:

1. If employer allows, convert traditional 401(k) balance to Roth 401(k)
2. Stay within same plan
3. Pay tax on converted amount
4. Future growth and withdrawals are tax-free

Advantage: Don't need to wait until leaving employer or reaching age 59½

How to Execute a Roth Conversion

Step 1: Calculate Optimal Conversion Amount

Use tax software or work with CPA to model:

• Current year income
• How much you can convert while staying in target bracket
• Total tax impact of conversion

Step 2: Verify You Have Funds to Pay Tax

Ensure you have enough in non-IRA accounts to pay the conversion tax without:

• Depleting emergency fund
• Taking on debt
• Withholding from the conversion itself

Step 3: Contact Your IRA Custodian

Call or log into your brokerage and initiate the conversion:

• Specify dollar amount or percentage to convert
• Choose whether to convert specific holdings or sell to cash first
• Confirm no withholding for taxes

Step 4: Track the Conversion for Tax Reporting

You'll receive Form 1099-R showing the conversion. This must be reported on your tax return:

• The converted amount is added to taxable income on Form 1040
• You'll owe tax when you file (or pay estimated taxes quarterly)

Step 5: Pay the Tax

Options for paying conversion tax:

• Increase withholding from paycheck (if still working)
• Make estimated tax payments quarterly
• Pay when you file your tax return

Important: If you don't pay enough tax during the year (via withholding or estimated payments), you may owe an underpayment penalty.

Step 6: Track the 5-Year Clock

Each conversion starts its own 5-year clock for penalty-free withdrawal. Keep records of:

• Conversion date
• Amount converted
• When the 5-year period ends

Tools and Resources for Conversion Planning

Tax Planning Software

• TurboTax or H&R Block: Has "What If" calculators to model conversion impact
• Tax projection software: More sophisticated multi-year modeling
• CPA or financial advisor: Professional analysis for complex situations

Key Numbers to Know

2024 Tax Brackets (Married Filing Jointly):

• 10%: $0 - $23,200
• 12%: $23,201 - $94,300
• 22%: $94,301 - $201,050
• 24%: $201,051 - $383,900
• 32%: $383,901 - $487,450
• 35%: $487,451 - $731,200
• 37%: $731,201+

Medicare IRMAA Thresholds (2024):

• Below $103,000 (single) / $206,000 (married): Standard premium
• Above these thresholds: Surcharges apply based on income level

Conclusion: Making Smart Conversion Decisions

Roth IRA conversions are one of the most powerful tools in retirement tax planning, but they require careful timing, thoughtful execution, and a multi-year strategic perspective. Converting at the right time—during early retirement, low-income years, or before RMDs begin—can save hundreds of thousands of dollars in lifetime taxes and create significantly more after-tax wealth for you and your heirs. Converting at the wrong time—during peak earning years, without funds to pay the tax, or in excessively large chunks—can result in paying unnecessarily high taxes and reducing your net wealth.

Key principles for successful conversions:

• Convert when your tax rate is temporarily low, not when it's high
• The early retirement window (ages 60-73) is often optimal for conversions before RMDs begin
• Spread conversions over multiple years to stay in lower brackets
• Pay conversion taxes from non-IRA funds to preserve the full converted amount for tax-free growth
• Consider state tax implications, especially if relocating
• Be mindful of Medicare IRMAA thresholds if age 63+
• Don't convert just to convert—have a clear plan and favorable tax arbitrage
• Estate planning benefits are substantial if leaving wealth to heirs

The decision to convert isn't all-or-nothing. You can convert part of your traditional IRA balance, test the waters with smaller conversions, or adjust your strategy year by year based on income fluctuations and tax law changes. The key is being intentional, understanding the tax implications, and recognizing conversion windows when they appear.

If you're uncertain about whether conversions make sense for your situation, work with a CPA or fee-only financial advisor who can model your specific circumstances, project multi-year tax impacts, and help you design a conversion strategy optimized for your retirement goals. The time you invest in proper conversion planning can result in six-figure tax savings over your lifetime—one of the highest-return "investments" you can make.