Roth IRAs

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.

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:

  • 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.

About the Author

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.

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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Know When You Can Retire

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022


Is There a Right Way to Invest in Bitcoin in 2022? Yes.

Is There a Right Way to Invest in Bitcoin in 2022? Yes.

Before you buy into Bitcoin, Ethereum of any other form of cryptocurrency, first, decide whether you want to be a dabbler (which is OK!) or a serious …
January 19, 2022
What to Expect When You Hire a Lawyer
personal finance

What to Expect When You Hire a Lawyer

If you’ve never worked with an attorney, you might not understand all the intricacies of the agreement you’re entering in. Here are some of the basics…
January 18, 2022
Why Women Need to Take a More Active Role in Their Financial Futures
Women & Money

Why Women Need to Take a More Active Role in Their Financial Futures

It’s a mistake to let someone else make all your decisions or take care of everything for you. You can start taking control of your finances by review…
January 17, 2022
What Assets Should Be Included in Your Trust?
estate planning

What Assets Should Be Included in Your Trust?

A revocable living trust is a great tool to help your assets pass smoothly to your beneficiaries, and it can significantly reduce the headaches of pr…
January 16, 2022