3 Questions to Ask Before Deciding if a Roth Conversion Is Right for You
Don't let a Roth conversion backfire. Learn the 3 questions every investor needs to ask about tax brackets, liquidity and asset allocation before making the move.
To Roth, or not to Roth? That is the question facing millions of retirees and pre-retirees this year. For many, a Roth conversion is a great way to defuse the 'tax bomb' of future Required Minimum Distributions (RMDs). But paying taxes upfront is a bad deal if the strategy doesn't fit your long-term goals. If you're currently debating a conversion, start by asking yourself these three questions to make sure you're making a choice that will save you money in the long run.
While there are pros to having your retirement savings in a Roth IRA — tax-free withdrawals in retirement, the elimination of future RMDs, and tax-free inheritance for your beneficiaries, sometimes having it in a traditional account is better. That's particularly true if you are a high earner and want to lower your income bracket, or you can't afford the tax hit from converting to a Roth.
It's a conundrum lots of people wrestle with. After all, timing is everything when it comes to a Roth conversion. If the conversion pushes you into a higher tax bracket, you may not only have to pay Uncle Sam more money, but you could see an impact on your retirement benefits, such as Medicare and Social Security.
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But a conversion can also be a boon, as it can mean tax-free growth and withdrawals later on. "Ultimately, it's about when you choose to pay taxes: now or later," says Deryck Gryne, a certified retirement counselor at Ally Invest. "It’s about flexibility and tax diversification."
If you're thinking that paying taxes now through a Roth conversion might be the better option, ask yourself these three questions first before you make a move.
1. Will my tax rate likely be higher in the future?
When it comes to converting to a Roth, this is the foundation of the decision, says Gryne. That's because the money you withdraw from your traditional retirement account to convert to a Roth is added to your modified adjusted gross income (MAGI) for the year.
If you are in a low-income bracket, then it may be a non-issue, but if the additional income pushes you into a higher tax bracket, the conversion could create a host of problems beyond paying more in taxes.
Depending on your MAGI, the conversion may trigger the Income-Related Monthly Adjustment Amount, or IRMAA for short. The IRMAA is an extra charge added to the monthly premiums for Medicare Part B and Part D if your MAGI from the two years prior exceeds certain limits. Because IRMAA is a two-year look-back, a 2026 conversion could affect your 2028 Medicare premiums. Plus, a conversion may mean you have to pay more taxes on your Social Security payments.
By the time you are in your mid-50s, you have likely hit your highest career tax bracket. During these peak earning years, it may be smarter to keep the money in traditional retirement accounts to lower your income and current tax bill. Converting to a Roth at this stage basically forces you to pay the highest possible tax rate on that money.
Pro tip: If you are doing a Roth conversion, Greg Welborn, principal and president of First Financial Consulting, says to fill up your tax bracket.
"Don't be concerned about the 10% and 12% bracket, but be concerned about the 12% and the 22% bracket," he says. You should aim to convert just enough to hit the top of your current bracket without any money spilling over and pushing you into higher tax territory.
2. Can I afford the tax bill without using retirement funds?
When doing a Roth conversion, the money you withdraw from your traditional retirement account is treated as ordinary income, which means you have to pay taxes on it.
If you can't afford those taxes without using money in your retirement account, then you may want to rethink the conversion. After all, if you withdraw money from the account, it lowers your balance, which means less capital to grow and compound.
Plus, if you are under 59½ and have taxes withheld directly from your IRA during the conversion, the IRS will consider that an early withdrawal and slap a 10% penalty on the amount taken out for taxes.
"The mathematics of conversion improves dramatically when you cover the taxes from taxable resources rather than withholding from the converted amount," says Brad Coyle, Jr., partner, managing director at Steward Partners.
Pro tip: To maximize the benefit of a conversion, Coyle says to make sure you have sufficient liquid, after-tax assets to fund any tax liability without creating a cash flow strain or forcing you to liquidate positions at inopportune times.
This is particularly risky if the market declines early in your retirement, as every dollar you withdraw has twice the negative impact over time. This is known as sequence-of-returns risk: by selling when the market is low, you're cashing out your savings faster than they can recover. Without that higher nest egg in place, your savings won't be able to benefit as much from an eventual market rebound.
"Don't let the tax tail wag the dog," Coyle says.
3. Do I know what I'm going to do with the money?
Converting to a Roth is one thing, but what you plan to do with that money is equally important. If you don't allocate it properly, you could miss the whole purpose of the conversion — tax-free growth, says Welborn.
"We find too few people are being strategic with their asset allocation," says Welborn. "They either have a bunch of accounts all over the place with random allocations, or they have the same allocation for every account. Having the same asset allocation for a taxable IRA and a Roth doesn't make sense."
The Roth should be the last place you withdraw money from, he says.
Pro tip: Since withdrawals from your Roth will be tax-free, Welborn says your allocation, while diversified, should be more aggressive in your Roth than in a taxable one. "The Roth should be positioned for the greatest amount of growth," he says.
Seek the help of a trusted adviser
Deciding if and when to convert to a Roth is complicated. While these three questions can steer you in the right direction, a trusted financial adviser can provide the precise modeling needed to make a final decision.
In 2026, the tax landscape is more nuanced than ever, and a move that saves you money in one area could inadvertently affect your Medicare premiums or Social Security benefits in another.
Everyone’s situation is different, and what works for you may not work for someone else. At the end of the day, remember that you worked hard to amass your retirement nest egg. You will eventually have to pay the tax man; the only question is whether you choose to do it now or later.
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