Is Now the Right Time for You to Make a Roth Conversion?

Timing is everything with Roth IRA conversions. Whether it’s the right time for you depends on where you are in life. Are you still working? Retired? Have you lost your spouse? All of these considerations can play a role in your decision.

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(Image credit: Getty Images)

If you pay attention to financial news, you’ve probably noticed that Roth IRAs — and Roth conversions, in particular — are having a moment.

OK, maybe it’s been more than a moment.

Because of the tax-free growth that Roth accounts offer, they’ve always been an effective retirement planning tool. But two pieces of legislation have made this an especially advantageous time for many savers to do a Roth conversion:

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  • The Tax Cuts and Jobs Act of 2017, which lowered tax rates starting in 2018 and is set to sunset at the end of 2025; and
  • The SECURE Act of 2019, which eliminated the popular “stretch IRA” strategy for those who plan to leave assets in a tax-deferred retirement account to their children or grandchildren.

Throw in the growing national debt and worries about how the government will continue to pay for programs like Social Security and Medicare — putting pressure on lawmakers to consider raising taxes — and you can see why Roth conversions are getting so much attention. If you think taxes will be higher in the future (and most people do), moving money to a Roth, where it will grow tax-free, can make a lot of sense.

But the devil is in the details.

What you might not see, if you haven’t read past the headlines proclaiming that now is the “best” time, maybe even the “perfect” time, to convert to a Roth, is that it might not be the right time for you.

The key is taking a lifetime view of taxes and understanding where you are in that tax lifecycle.

For most younger people who are early in their career, opening a Roth 401(k) or Roth IRA should be a no-brainer — especially if they believe they’re going to make more money in their 40s and 50s than they are in their 20s and 30s.

Those who are older, however, may want to slow their roll and get some advice from a tax expert before moving forward with a Roth conversion. Remember: When you take funds from a traditional IRA and convert them into a Roth, you have to pay taxes on the entire amount converted at your current ordinary income tax rate. So, when you’re talking about a Roth conversion and tax planning, it’s important to get the timing right.

It may help to break that timing down into four phases (plus a caveat):

When You’re Close to Retirement but Still Working

Even with recent tax reforms, if you and your spouse are in your peak earning years, you’re likely in a higher tax bracket and paying a higher tax rate now than you will in retirement (assuming you don’t live off of every dollar you make and your expenses in retirement will be less than your current income). If you start converting money from a tax-deferred account without a plan to manage your bracket, those withdrawals (which are taxed as ordinary income) could push you toward an even higher tax rate.

A conversion still may be a good idea for you, but you might want to wait until you or your spouse, or both of you, have retired.

When You’re in Your First Years of Retirement

If you expect your taxable income will be reduced (compared to when you were working) in retirement, this might be the best time to do a conversion. You are likely to have less taxable income than when you were working. Your main sources of income may be Social Security, distributions from IRAs, or using some cash in the bank/non-retirement savings.

Distributions from your checking and savings accounts aren’t taxable income, distributions from a non-retirement account aren’t taxable income (the dividends and any capital gains may be), and worst case, depending on other income, at least 15% of your Social Security will be tax free.

During this time period, you may have the most control you are ever going to have with regards to what shows on your tax return, which opens the door for potential tax planning and Roth conversions.

When You’re in Your 70s

There isn’t an age limit on Roth conversions, so you can do one at any time. But suppose you “maximized” your Social Security payments by delaying to age 70 and now you have required minimum distributions (those pesky forced withdrawals you have to take from tax-deferred accounts and pay taxes on starting at 72), your income could actually be going up and be higher at this stage of retirement than it was earlier. And, in case you were wondering, a Roth conversion can’t be done using the money from RMDs. So, any Roth conversion during this time would have to be on TOP of your RMD, likely causing it to be taxed at a higher tax rate.

So, again, it’s important to consider what moving money to a Roth would do to your tax bracket and tax rate.

When You’re a Surviving Spouse

When you’re retired and your spouse dies, two significant things can rattle your financial plan. First, the lower of your two Social Security payments will go away, removing an important source of tax-advantaged income. And when you change your filing status from married filing jointly to single, your taxes will likely go up — especially if you’re pulling income from a tax-deferred retirement account to replace the lost Social Security benefit.

A Roth conversion may still be a consideration at this point — if your replacement income is coming from tax-free life insurance, for example, or if you plan to downsize and can live on a lower income than in the past. But you should definitely keep the tax ramifications of being a single filer in mind.

A Caveat: If You’ll Need the Money Soon

No matter what stage of life you’re in, you’ll also want to be aware of the “Five-Year Rule” on Roth conversions. Basically, if you withdraw earnings from a Roth IRA that you have not held for at least five years, you’ll have to pay taxes on your earnings. You won’t have to pay taxes on your contributions, because you’ll already have done that when you moved the money. But if your goal in opening a Roth is tax-free growth, you’ll have to give it time to make that work.

Because a large conversion amount can cause your income to spike — no matter what stage of pre-retirement or retirement you’re in — planning is essential. It’s critical to understand (or work with someone who understands) the different phases of taxes in retirement and the interaction between a Roth conversion and many other aspects of your financial life (such as the taxes on your Social Security, how much you pay for Medicare premiums, and even the tax rate you pay on qualified dividends and capital gains).

If you were to look at your personal situation and begin to lay out your income during each of those tax time periods, you can begin to determine whether a Roth conversion actually makes sense for you. And if it does, then the name of the game, my friends, is to get money out of the IRA and into the Roth at whichever one of those tax phases is going to be the cheapest for you.

While Roth IRAs and Roth conversions are fantastic tools for potentially setting up a tax-free source of income in retirement or a tax-free legacy for heirs, rushing into a Roth conversion without running the numbers and doing some research could lead to unpleasant consequences. If you aren’t already working with a financial adviser who is a retirement specialist, now may be the best time, maybe even the perfect time, to get some help.

Kim Franke-Folstad contributed to this article.


The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Michael Neuenschwander, CFP, CPA
Partner, Outlook Wealth Advisors LLC

Michael Neuenschwander, CPA, CFP®, teams with his father, Allen Neuenschwander, CPA, CFP®, at their financial planning firm, Outlook Wealth Advisors LLC in Texas. Michael is an Investment Adviser Representative and a licensed insurance professional.