IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA

An IRA conversion to a Roth IRA is a popular pre-retirement or early-retirement move. Roth IRAs offer several benefits that traditional retirement plans don’t. Not only are investment gains in a Roth IRA tax-free, but withdrawals are tax-free, as well.

Just as important, Roth IRAs don’t require savers to take required minimum distributions (RMDs), as traditional IRAs and 401(k)s do. This allows Roth IRA holders to benefit from tax-free growth indefinitely and to use their retirement accounts to pass on wealth to younger generations.

However, because higher earners are barred from making direct contributions to a Roth IRA, some people find themselves needing to convert a traditional IRA or 401(k) to a Roth IRA after the fact. The process is fairly simple, but it’s essential to get the timing of those conversions just right.

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IRA conversion to Roth from traditional accounts

If you have a traditional IRA, converting it is a straightforward process: contact the financial institution holding the account and complete the necessary paperwork. With a 401(k), things could get a touch more complicated, but not unreasonably so.

Many 401(k) plans allow direct rollovers to a Roth IRA. If not, you may need to open a traditional IRA, receive a check for your 401(k) balance and roll the funds into an IRA within 60 days. Once your traditional IRA is funded, you can initiate a Roth conversion.

Another option, if you have a 401(k), might involve an "in-plan conversion," which means converting your traditional employer retirement plan to a Roth, then moving those funds into an IRA.

You should know that a Roth IRA conversion is a taxable event. The amount you move triggers a tax bill for the year you make the conversion. That means you must plan ahead for these taxes.

You should also know that there's a five-year waiting period before you can withdraw converted Roth IRA funds to avoid a 10% penalty. However, that rule doesn't apply to the principal sum converted — only gains. It also doesn't apply once you turn 59½. At that point, you’re entitled to penalty-free withdrawals from any tax-advantaged retirement account you have.

Who benefits from a Roth IRA conversion?

People who expect to be in a higher tax bracket in retirement than during their working years can commonly benefit from a Roth IRA conversion. But there’s more to the story.

Bryan Bell, CFP®, ChFC®, is a vice president, senior investment adviser, and regional director at First Horizon who says Roth conversions can be especially useful for people in cyclical industries.

“Mortgage brokers and real estate agents, for instance, tend to go through feast-or-famine years,” he explains. “As such, we advise them to make maximum contributions to their retirement plans during feast years and then do a Roth conversion in famine years.”

Like Bell, Brian Schmehil, managing director of wealth management at The Mather Group, LLC, says Roth conversions are optimal for people who suddenly find themselves in a lower tax bracket.

“A Roth conversion may be wise if you’re transitioning from filing jointly to single due to a divorce or widowhood,” he says.

Doug Carey, CFA and president of WealthTrace, agrees and says the key is to focus on what your taxes look like now vs later.

“I have found that people who retire in their early to mid-50s, do not have a pension, and have very little taxable income from investments are prime candidates for a Roth conversion,” he says.

Timing a Roth IRA conversion

Because Roth IRA conversions are taxable events, it’s crucial to get the timing right. Natasha Howe, wealth manager and vice president at Siebert Financial, says the best time to do a Roth conversion is towards the end of any year in which you've received the least amount of taxable income.

“The reason why you should wait to do it towards the end of the year is because at that point you will have a better sense of your total projected income, which ultimately determines which tax bracket you fall into for that specific year,” she explains.

Carey also says that generally speaking, the sooner you can start converting, the better, provided you have a lower income tax rate than you expect to have in the future.

“By starting earlier, you allow the benefits of the Roth IRA tax treatment to compound over time,” he explains. To this point, Carey notes that the longer your life expectancy, the more valuable a Roth conversion becomes.

As he explains, there’s a break-even period before the conversion becomes beneficial because of the immediate tax bill it triggers. “You need time for the tax benefits to offset the upfront costs,” he says.

Carey also thinks it’s wise to spread Roth conversions over time to avoid jumping into a higher federal income tax bracket.

Bell, meanwhile, suggests paying attention to the stock market when a Roth conversion is on the table.

“Consider making a conversion when the market is down,” he says. “The strategy is to convert and pay taxes when the balance is relatively low and then let it grow back tax-free.”

Schmehil also warns that you must consider how your Roth conversion could impact your Medicare costs. Higher earners are subject to income-related monthly adjustment amounts, or IRMAAs, which drive up Part B and D premiums based on your modified adjusted gross income from two years earlier.

"If you're under 63 and planning to enroll in Medicare at 65, Roth conversions might be beneficial since you won’t yet face IRMAA surcharges," he explains. Otherwise, be cautious: a Roth conversion could increase your Medicare costs, at least initially.

The OBBB complicates things a bit

The passage of the One Big Beautiful Bill (OBBB) has introduced changes that could complicate Roth conversions, warns Schmehil.

"Instead of merely converting up to a certain income tax bracket or being mindful of IRMAA income levels, you now need to be aware of losing the additional $6,000 deduction for seniors over 65, with phaseouts beginning at $75,000 for singles and $150,000 for married couples," he explains.

Schmehil also warns those considering a Roth conversion to keep the new SALT cap rules in mind.

"There is an increased SALT cap of $40,000 for both single and joint filers, but it begins to phase out at $500,000 MAGI," he explains. "Staying below these income thresholds may make sense in certain circumstances, even if it means converting less in a given tax bracket."

If the OBBB makes a Roth conversion less appealing, Schmehil says there are ways to soften the potential tax blow from RMDs in a traditional IRA.

"As long as you plan to make qualified charitable distributions to offset most, if not all, of your RMDs, there’s no need to do Roth conversions just to pay taxes to the government, which could have been avoided altogether if the money was directed to charity," he insists.

All told, says Schmehil, there needs to be a compelling upside for a Roth conversion to pay off.

"Conversions only make sense if you’re achieving some form of tax arbitrage, meaning paying less now to avoid higher taxes in the future," he concludes. "Estate taxes and Medicare premium increases are also part of this consideration."

Read More

• Four Roth IRA Pitfalls Your Adviser May Not Tell You About
• Should You Convert a Traditional IRA to a Roth After 60?
• 6 Changes to IRAs, 401(k)s and HSAs in 2026
• The Average IRA Balance by Age
• Roth IRA vs. Traditional IRA: Which is Better?