Roth Conversions – When You Should Consider One?

With growing government debt and the prospect of increasing taxes, you may wonder if a Roth conversion is right for you. But there are many nuances to deciding on a Roth conversion and then following through on the conversion process.

You will pay taxes on the converted amount. In some cases, a Roth conversion can move you into a higher tax bracket, depending on your other taxable income. If you will need the money in five years or less, this tax planning strategy might not be a good fit for your situation.

Understanding your options can help in making a confident decision. That being said, here are a few quick factors to keep in mind as you explore whether a Roth conversion might make sense for your financial situation. You will also want to speak with your tax advisor and any other experienced professionals as needed for further guidance on your personal situation.

What Is a Roth Conversion?

A Roth conversion is the transfer of assets from a tax-qualified retirement account, such as a traditional IRA, to a Roth IRA. A tax-qualified account is one in which you deposit pre-tax dollars, and the money and its earnings grow tax-deferred.

The tax-qualified account, which might be a traditional IRA, a simplified employee pension (SEP), or a 401(k) plan, will have been started and maintained with pre-tax dollars. A Roth IRA, on the other hand, is begun and maintained with after-tax dollars.

As a result, when you convert from the traditional to the Roth account, you will have to pay income taxes (federal and state) on the transferred money at your marginal tax rate.

However, your future withdrawals of income and principal from the Roth will usually be tax-free.

Advantages & Disadvantages of a Roth Conversion

Any conversion to a Roth will offer various potential advantages and disadvantages. You will need to consider your own situation carefully to decide whether the conversion works for you.

These pros and cons may not be the same for all individuals, but instead should be considered within your own financial situation and goals. Here are some of the pros and cons of converting your traditional retirement account.

Pros of Converting to a Roth Account

Tax-Free Withdrawals

Five years after you convert your traditional retirement account to a Roth, you can withdraw those assets and the income produced by them tax-free. If you withdraw assets before that 5-year period is over, you may have to pay a 10 percent Roth IRA early withdrawal penalty on the entire amount you withdraw.

Note that each converted account has its own five-year period, starting with the conversion date.

Withdrawals at Age 59.5

If, on the other hand, you are at least 59.5 years old when you make your first withdrawal from your converted Roth IRA, there is no early withdrawal penalty.

First-Time Home Purchase

You will also avoid the penalty for a withdrawal (of up to $10,000) to apply to a first-time home purchase. This might not apply to people who are near retirement age and considering a Roth conversion for future retirement income.

Traditional IRA Penalty Exceptions

The same exceptions that apply to the penalty on a traditional IRA will apply to your Roth. These include withdrawals for:

  • Unreimbursed medical expenses
  • Health insurance premiums while you are unemployed
  • You have suffered a permanent disability
  • Higher education expenses
  • Fulfilling an IRS levy

Cons of Converting to a Roth Account

Here are a few potential disadvantages to a Roth conversion in different circumstances.

Conversion Is Taxable Event

The biggest disadvantage of converting to a Roth IRA is that you must add the entire sum to your taxable income for that year. This requirement can move you into a higher tax bracket and leave you with a big tax payment due.

For this reason, many people plan to convert in a year where they expect to have less income.

Contributions No Longer Deductible

Contributions to your traditional retirement account are with pre-tax dollars. You are now making contributions to a Roth with post-tax dollars.

That means you no longer have that tax deduction for your IRA contributions.

Five-Year Rule

As noted above, unless you are over 59.5 or meet another exception, your funds can’t be withdrawn tax-free until five years from the conversion date.

Retirement Tax Bracket

The tax-free advantages of a Roth account may not be worth it if you expect to be in a much lower tax bracket after you retire.

How Are Roth Conversions Taxed?

You will pay taxes on the total amount of pre-tax retirement savings that you choose to convert to a Roth IRA as ordinary income in the year of the conversion. That means that you will pay taxes on these dollars at your highest marginal rate.

The tax will be due on any contributions made on a pre-tax basis and on their gains at their total current value. The IRS collects their tax on the return you file for the year of the conversation.

How to Do a Roth Conversion?

First, you will need to open a Roth IRA account at your current financial company or at another financial company. Then contact the custodian of your traditional IRA or the 401(k) plan administrators and find out what they will need from you for the conversion.

Your financial professional can help you coordinate these details. The final step is to submit the required paperwork to authorize the asset transfer.

What Is the 5-Year Rule for Roth Conversions?

The 5-year rule says that, unless you meet one of the stated exceptions, you may not withdraw money from your Roth IRA until at least five years have passed since the conversion.

Do You Have to Pay State Taxes on a Roth Conversion?

Yes, if you live in a state with an income tax (and some are very high). You will also have to pay that tax in the year you convert your traditional retirement accounts.

Thus, an alternative to converting is relocating to one of the seven states with no income tax.

Where to Report Your Roth Conversion

You report your traditional IRA conversion on Form 1040, line 15, the total conversion amount on line 15a, and the taxable portion on line 15b.

If the conversion is from an employer-sponsored plan, you report the same numbers on lines 16a and 16b. This income will, of course, impact your Adjusted Gross Income for your state taxes, if any, as well.

Is a Roth Conversion Right for You?

So, is a Roth conversion right for you? These situations might make it worthwhile:

  • You expect an equal or higher tax rate during retirement
  • Your state has a high income rate, and you don’t plan to move
  • You can afford the tax hit of the conversion now
  • You had low income this year
  • You are sure you won’t need the money for five years or will meet a stated exception

As always, experienced financial professionals and tax advisors can help you in making these determinations for your personal situation.

Looking for Help with Your Financial Future?

Roth conversions are a tax-smart money move, and in many situations they can be beneficial. But taxes are just one part of someone’s overall financial picture, particularly for retirement. If you are looking for a financial professional to help you with your looming retirement ‘what-ifs’ and gain more peace of mind, many independent financial professionals are available to help you at

You can use our “Find a Financial Professional” section to connect with someone directly. Please feel free to contact them with any initial questions, and if there is potential for a working relationship, you can request an initial appointment to discuss your situation. Should you need a personal referral, please call us at 877.476.9723.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member