Should You Do A Roth IRA Conversion? Nine Things to Consider

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Are you thinking of converting your traditional IRA to a Roth IRA? Now might be a good time to consider it. But before you pull the switch, there are lots of factors you will want to consider when it comes to Roth conversions, ranging from the possibility of future tax rate changes to whether the conversion will subject you to higher Medicare premiums and everything in between. Below, we discuss nine important factors to keep in mind when deciding to do a Roth conversion.

1. Present, Future Income Tax Rates

When you convert a traditional IRA to a Roth IRA, you will have to pay income tax on the conversion for the year you do the switch. But once the money is in the Roth IRA, future earnings and distributions that you take from the account are generally tax-free. So present and future income tax rates are key to deciding on whether a Roth conversion makes sense to you.

If you expect the income tax rate that you will pay in retirement will be equal to or higher than the rate in the year of the Roth conversion, then switching to a Roth IRA can pay off from a tax perspective. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous.

Federal income tax rates are low right now, and we think they will stay low for a while. Although the lower rates enacted in the 2017 Tax Cuts and Jobs Act are set to expire at the end of this year, it's widely thought that President Trump and congressional Republicans will extend them in their one big, beautiful bill.

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We have heard that Republican lawmakers are mulling whether to impose higher taxes on millionaires. There's been chatter that some GOPers want to bring back the 39.6% top federal income tax rate for people who report $1 million or more of income. The revenues from this proposal could be used to help offset other tax cuts that lawmakers want, such as no tax on tips or overtime pay. It's too soon to know whether this tax hike proposal will come to fruition. Naysayers argue that raising income tax rates on individuals is anathema to the views of the Republican Party.

2. Distributions From Roth IRAs

Roth IRAs are more flexible than traditional IRAs when it comes to withdrawing funds, as you can see here:

• You can withdraw your contributions from Roth IRAs at any time without having to pay income tax.
• Distributions of earnings from Roth IRAs are free of income tax, provided you are 59 1/2 or older when you take the distribution, and at least five years have passed from the year that you first put funds in any Roth IRA that you own, either by contribution or through a Roth conversion.

3. Don't Use IRA Funds to Pay Tax on the Conversion

As we already discussed, you are responsible for paying the income tax on the Roth conversion for the year you do your switch. An important tip to keep in mind is that you should not use funds within your IRA to pay the tax on the conversion.

A Roth conversion is treated as a taxable distribution from your traditional IRA to you followed by a contribution of those funds to your Roth IRA. The custodian of your traditional IRA will by default withhold 10% federal tax from the converted funds. This withheld amount is treated as a distribution to you on which you have to pay tax, in addition to the remaining funds that you move to the Roth. That is why experts advise paying tax owned on a Roth conversion with non-IRA funds and requesting that the custodian withhold 0% on the conversion.

4. Roth IRAs Don't Have RMDs

There are no required minimum distributions for owners of Roths. So if you don't otherwise need the money from your Roth IRA while in retirement, you can let it continue to grow tax-free within the Roth.

Keep in mind, though that if you are subject to RMDs from your traditional IRA, you must first take your annual RMD from your traditional IRA in the year of the switch before you do the Roth conversion.

5. The 10-Year Cleanout Rule For Inherited IRAs

For most non-spousal beneficiaries who inherit an IRA after 2019, the IRA funds must be distributed to that beneficiary within 10 years after death. So, if an IRA owner dies in March 2025, the beneficiary must clean out the IRA no later than December 31, 2035.

This 10-year cleanout rule applies to beneficiaries of traditional IRAs and Roth IRAs, but there are a couple of key distinctions. First, beneficiaries of inherited Roth IRAs don't have to pay tax on the distributed funds, unlike beneficiaries of traditional IRAs. Second, beneficiaries of Roth IRAs needn't take an annual RMD from the inherited Roth account during the 10-year period. Many beneficiaries of traditional IRAs have to take an annual RMD in each of the 10 years if the original IRA owner died on or after his or her beginning RMD date.

6. Higher Medicare Premiums

IRA owners who do a Roth conversion will report income from the conversion on their federal tax return for the year of the switch. This additional income from converting might trigger higher Medicare premiums if you have Medicare.

Medicare participants with modified adjusted gross incomes over a certain amount pay a monthly surcharge for Parts B and D coverage on top of their regular monthly premiums. In determining 2025 Medicare premiums, the government looked at modified AGI reported on 2023 federal income tax returns. If your modified AGI on your 2023 return was higher than $212,000 for joint filers or $106,000 for single filers, then you are paying a monthly premium surcharge this year for Medicare Parts B and D coverage on top of your regular monthly premium. The surcharge amount increases as your income goes up.

The modified AGI amounts are indexed each year for inflation and will be slightly higher for the 2025 modified AGI used for figuring the 2027 monthly Medicare premium surcharges. Income from converting from a traditional IRA to a Roth IRA is included in the calculation of modified AGI.

7. Value of Investments In Your IRA

Converting to a Roth IRA can pay off if you expect that the assets in your IRA will soar in value. The same rationale applies if you have assets in your traditional IRA that are now depressed in value. For example, Roth conversions are sometimes more popular when there is a downturn in the market.

8. Partial Conversions

There is nothing in the tax law that requires you to convert all of the funds in your traditional IRA to a Roth IRA at one time. You can do Roth conversions in increments over time to space out the income tax hit on the conversion. For many IRA owners, a series of partial conversions over the years might be a more effective strategy.

9. You Can't Undo a Roth Conversion

Prior to 2018, if you converted all or part of a traditional IRA to a Roth IRA, you had until Oct. 15 of the year following the conversion to undo the switch and eliminate the tax bill by transferring the funds back to a traditional IRA. This is called a recharacterization and usually made sense if the Roth IRA lost money shortly after the conversion. The 2017 Tax Cuts and Jobs Act ended recharacterizations of Roth conversions. So if you do a Roth conversion, you are stuck with your original income tax bill, even in cases where your Roth IRA assets go down in value soon after the conversion.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

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