Roth conversions, if done right, can lower your tax bill over your lifetime. But be careful. Roth conversions pose traps, and the unwary can easily get caught. Here are eight factors to consider in deciding whether to convert all or part of a traditional IRA to a Roth IRA.
1. Present and future tax rates
A Roth conversion is a taxable event in the year of the switch. So, if you expect that the income tax rate you will pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous.
2. Roths offer several advantages
You can withdraw contributions at any time tax-free. Distributions of Roth earnings are tax-free, provided you are 59½ or older and at least five years have passed since you first put funds in any Roth IRA. Roth IRAs don’t have required minimum distributions (RMDs), so the money can stay in the account, generating tax-free earnings. Also, conversions by the original IRA owner can ease the pain of the 10-year cleanout rule for inherited IRAs. Many non-spouse beneficiaries of inherited Roth IRAs would still have to empty the accounts within 10 years, but the money would be tax-free to them, unlike beneficiaries of traditional IRAs.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
3. Multi-year strategy
It’s best to look at Roth conversions as a multi-year planning tool and not as a one-time-only decision. Doing conversions in increments over time helps you space out the tax hit. Review your income and deductions each year and determine with your financial adviser the optimal amount of traditional IRA money to convert so that the conversion doesn’t move you into a higher tax bracket or cause you to lose out on tax breaks.
4. Your adjusted gross income matters
Adjusted gross income, or more specifically, modified adjusted gross income (MAGI), is often used to determine eligibility for certain tax benefits or tax breaks or to determine if you are subject to surtaxes or surcharges. For example, it’s used to see if you qualify for any of these five new temporary tax breaks in the “One Big Beautiful Bill:” The $6,000 senior deduction for people age 65 and older, the $40,000 cap on deducting state and local taxes (SALT) on Schedule A, the deduction for up to $25,000 of tips, the deduction for up to $12,500 of overtime pay, and the deduction for up to $10,000 of car loan interest.
All five tax breaks or benefits begin to phase out at modified adjusted gross income levels above a certain threshold. Your modified adjusted gross income also determines whether you will be hit with the 3.8% surtax on net investment income and whether your Social Security benefits are taxed. You don’t want the additional income from a Roth conversion to cause you to lose deductions and credits you could otherwise be entitled to. Using a multi-year strategy and doing incremental conversions can help you manage this.
5. Medicare premiums
The additional income from a Roth conversion can trigger higher Medicare premiums, known as IRMAA. Individuals with 2023 modified adjusted gross incomes over $212,000 for joint filers and $106,000 for singles pay a monthly surcharge in 2025 for Parts B and D coverage on top of their regular premiums. These figures will rise a bit for 2025 modified adjusted gross income used for figuring 2027 monthly Medicare premium surcharges. Modified adjusted gross income includes income from a Roth conversion.
6. Paying the tax on converted funds
A Roth conversion is treated as a taxable distribution from your traditional IRA when those IRA funds are contributed to the Roth. By default, the IRA custodian will withhold 10% federal income tax. This withheld amount is treated as a distribution to you on which you must pay tax, in addition to the actual money moved to the Roth. In essence, you lose out on a portion of the IRA money being converted into the Roth. This is why financial experts advise you to pay tax owed on the conversion with non-IRA funds, if possible, and you ask the IRA custodian to withhold 0% from the converted funds.
7. IRA owners of RMD age
If you are of RMD age (73 or older for now, though RMD age will gradually rise over the next few years), you must take your annual RMD from your traditional IRA before doing a Roth conversion for the year. This applies whether you convert the full IRA or just a portion. There is another rule for owners of multiple traditional IRAs. You must withdraw your total aggregate IRA RMD for the year before doing a Roth conversion.
8. You can't undo a Roth conversion
Prior to 2018, if you did a Roth conversion, you could undo it and eliminate the tax bill by transferring the funds back to your traditional IRA. This made sense if the Roth lost money shortly after the conversion. Now if you do a conversion, you are stuck with your tax bill.
Read More
-
New Opportunity Zone Rules Triple Tax Benefits: Your StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
Honeywell Leads Dow Higher: Stock Market TodayOil prices got a lift after the Treasury Department announced new sanctions on Russia's two largest oil companies.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 Strategy
New IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
Avoid These Four Mistakes in the Run Up to RetirementYou can learn a thing or two from the retirees who went before you.
-
Where to Deposit Your Social Security CheckIf you receive Social Security checks, where you deposit them matters because it can help grow your earnings. See the best options.
-
Over 50 and Can’t Stop Snacking? Here's How to Beat Junk Food AddictionGiving up ultra-processed food is designed to be hard. Here's why so many of us reach for the junk and how to gradually kick the habit.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
I'm 52, make $210K a year and heard I may lose a 401(k) tax break in 2026. Should I max out my 401(k) anyway?We asked financial experts for advice.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Social Security Payment Schedule for 2026Find out when you can expect your 2026 Social Security payments and the date you get paid when your scheduled day falls on a holiday.
