Should I Do a Roth Conversion? Here’s What Taxpayers Should Know

Should I Do a Roth Conversion? Here’s What Taxpayers Should Know

If you’ve been researching retirement strategies lately, you’ve probably seen a lot of talk about Roth conversions—sometimes called “backdoor Roth IRAs.” They’re often promoted as the ultimate solution for tax-free retirement income.

But as a CPA, I can tell you from experience: Roth conversions are not a one-size-fits-all solution. They can be an excellent tool for some people and a costly mistake for others. Whether it makes sense for you depends on such things as (but not limited to) your income, tax bracket, goals for retirement, and your family’s future plans.

Let’s take a closer look at what a Roth conversion really is, when it might make sense, and when you might want to hold off.

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What Exactly Is a Roth Conversion?

A Roth conversion is when you move money from retirement plans such as a Traditional IRA or 401(k) into a Roth IRA. When you do this, you pay income taxes now on the amount you convert.

The advantage: Once your money is in a Roth IRA, it grows tax-free—and you won’t owe taxes when you withdraw it in retirement. That’s what makes Roth accounts so appealing.

The tradeoff is timing: you’re choosing to pay taxes now instead of later. For many families, especially those nearing retirement or recently retired, deciding when (or whether) to convert can be a crucial part of tax planning.

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Why Roth Conversions Are Getting So Much Attention

There are a few reasons Roth conversions are such a popular topic right now:

• Federal tax rates are historically low through 2025 due to the 2017 Tax Cuts and Jobs Act. Many advisors believe tax rates will rise in the future.
• Required Minimum Distributions (RMDs) start at age 73 or 75, forcing you to take taxable withdrawals. A Roth IRA doesn’t have RMDs.
• Market fluctuations create opportunities to convert when portfolio values are lower—meaning you pay less tax on the conversion.

But just because you can do a Roth conversion doesn’t always mean you should.

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The First Question: What’s Your Tax Bracket—Now and Later?

When you convert, you’re taking a taxable event today in exchange for tax-free income later. So if you expect to be in a higher tax bracket in retirement, a conversion may save you money long-term.

However, if you expect your income—and therefore your tax rate—to drop in retirement, converting now might mean paying more tax than you would otherwise.

Example 1: A Conversion Makes Sense

Sarah, a 50-year-old engineer, expects her income to grow substantially before she retires. She’s in the 22% tax bracket now but expects to be in the 32% bracket later, based on her company pension and investment income. Converting a portion of her IRA now makes sense—she locks in a lower tax rate today and enjoys tax-free growth in the future.

Example 2: A Conversion May Not Help

Tom, a 62-year-old, is retiring next year and expects his income to drop significantly once he stops working. He’s currently in the 24% bracket but expects to be in the 12% bracket after retirement. For him, waiting to withdraw funds later could mean paying less in taxes overall.

The takeaway: Your future tax rate matters just as much as your current one.

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Can You Pay the Taxes Without Touching the IRA?

This is one of the biggest make-or-break factors.

When you convert, the amount you transfer to a Roth counts as taxable income. Ideally, you want to pay the taxes using money outside your retirement account—for example, from savings or a brokerage account.

Why? Because if you use funds from your IRA or 401(k) to pay the tax bill, you’re reducing the amount that can grow tax-free in your Roth. You’re also potentially triggering early withdrawal penalties if you’re under 59½.

I often tell clients: A Roth conversion makes sense if you have the cash available to pay the tax bill upfront.

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Time Horizon: The Longer, the Better

A Roth conversion typically works best when you can keep it in the Roth for at least 10 years.

If you’re 35 or 45, converting now gives your money decades of tax-free compounding. But even if you’re in your 50s or 60s, it can still make sense if you don’t need the money immediately.

Remember the five-year rule: any funds you convert must remain in your Roth IRA for at least five years before you can withdraw them penalty-free (unless you’re over 59½). That rule applies separately to each conversion.

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Roth IRAs and Required Minimum Distributions (RMDs)

One of the biggest benefits of a Roth IRA is that you’re not forced to withdraw money in retirement.

Traditional IRAs and 401(k)s require you to start taking withdrawals—called RMDs—once you reach age 73 (or 75 for some younger retirees). These withdrawals increase your taxable income and can affect Medicare premiums.

A Roth IRA, on the other hand, has no RMDs during your lifetime. That gives you more flexibility and control over your income in retirement.

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Estate and Legacy Planning Benefits

If leaving a financial legacy is part of your plan, Roth IRAs are one of the most tax-efficient tools available.

Your heirs must still withdraw the funds within 10 years of inheriting, but unlike traditional IRAs, those withdrawals are completely tax-free.

That can make a big difference for children or grandchildren who may already be in higher tax brackets.

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Market Timing: When You Convert Matters

If the market takes a dip, that may actually be a great time to do a conversion. You’ll pay taxes based on the lower value of your investments, and all future growth will happen inside your tax-free Roth.

For example, if your traditional IRA is worth $200,000 today but drops to $160,000 during a market correction, converting now means paying tax on $160,000 instead of $200,000. Then, when it rebounds, that growth is tax-free.

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Watch Out for Hidden Tax Effects

Roth conversions can impact more than just your income taxes. A large conversion could also:

• Push you into a higher federal tax bracket
• Increase your Medicare premiums (IRMAA)
• Reduce eligibility for certain tax credits or deductions
• Affect ACA health insurance subsidies if you’re under 65
• Make more of your Social Security taxable

Before doing any conversion—especially a large one—it’s important to look at your entire financial picture, not just your IRA balance. That’s where working with a CPA can make a big difference.

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You Don’t Have to Convert All at Once

Many people assume they need to convert their entire IRA or 401(k) in one year—but that’s often not ideal.

A smarter strategy may be to do partial conversions over several years, often referred to as “filling up your tax bracket.”

For instance, if you’re in the 12% tax bracket and have $20,000 of room before you’d move into the 22% bracket, you could convert $20,000 now, pay taxes at the lower rate, and reassess next year.

This approach helps control your tax exposure and smooths the impact over time—especially useful for retirees in their early retirement years.

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When a Roth Conversion Makes the Most Sense

From my experience working with clients, a Roth conversion usually makes sense if you:

• Expect higher tax rates in the future
• Can pay the tax bill with outside funds
• Have years of growth ahead before retirement
• Want to avoid RMDs later
• Hope to leave tax-free money to your heirs

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When You Might Want to Skip It

You may want to hold off or avoid a conversion if:

• You expect to be in a lower tax bracket later
• You don’t have cash available to pay the taxes now
• You’ll need the converted funds within a few years
• You’re close to triggering higher Medicare or ACA costs
• More of your Social Security may be taxable

There’s no universal answer—what’s right for your neighbor or coworker may not be right for you.

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Final Thoughts: It’s Not “All or Nothing”

I don’t believe in blanket financial advice—and that includes Roth conversions. They can be an excellent tool, but only when used thoughtfully, with a clear understanding of your taxes, income, and long-term goals.

The best way to decide is to run the numbers. Every year I help clients determine whether a Roth conversion makes sense for them. Sometimes the answer is “yes, perhaps in stages.” Other times, the math says, “not at all, or not yet.”

Either way, you’ll make a better-informed decision—and that’s what good financial planning is all about.

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Let’s Talk About Your Situation

If you’re wondering whether a Roth conversion is right for you, I’d love to help you evaluate it. Together, we can:

• Compare your current and future tax brackets
• Estimate the tax cost of conversion
• Create a phased conversion strategy (if appropriate)
• Review how it fits into your retirement and estate plan

Call me at 248-909-2880 or email Mark@persitzcpa.com to schedule a meeting and discuss your plan and goals.

Let’s make sure your retirement dollars work as efficiently as possible—for you and your family.