A conversion makes sense if you expect to be in a higher tax bracket later, or if you have years before you need the money

A Roth conversion means moving money from a traditional IRA (where contributions were tax-deductible) into a Roth IRA (where withdrawals in retirement are tax-free). You pay income tax on the amount you convert in the year you do it. Whether this makes sense depends on your current tax bracket, how long until you retire, and whether you can pay the tax bill without touching the IRA itself.

The core trade-off is simple: pay taxes now at today's rates, or pay taxes later at rates you cannot predict. If you believe tax rates will be higher when you retire, converting now locks in a lower rate. If you are already in a high tax bracket this year, converting might push you into an even higher one, which defeats the purpose.

Conversions are permanent. Once money moves to a Roth, you cannot move it back. The IRS allows one recharacterization per year (moving money back to a traditional IRA), but only if you do it before your tax return is due. After that, the conversion stands.

Key Takeaways

  • You pay ordinary income tax on the full amount you convert in the year of conversion, so a large conversion can push you into a higher tax bracket.
  • After conversion, the money grows tax-free and you owe no tax on withdrawals in retirement, which saves money if tax rates rise or your income is high later.
  • Conversions make the most sense if you have 10 or more years before retirement, can pay the tax bill from outside the IRA, and expect higher tax rates in the future.
  • If you have a traditional IRA, SEP-IRA, or SIMPLE IRA, the pro-rata rule may force you to pay tax on a portion of all your IRAs combined, not just the amount you convert.
  • You can convert a portion of your IRA instead of all of it, which lets you spread the tax hit across multiple years.

When the tax bill makes sense to pay now

Conversions work best when you can pay the income tax from money outside the IRA — a savings account, paycheck, or other source. If you have to withdraw from the IRA itself to cover the tax, you lose the compounding benefit and may owe an early withdrawal penalty if you are under 59½.

The math favors converting if you are in a lower tax bracket now than you expect to be in retirement. This happens most often to people who take a sabbatical, get laid off, or retire early and live on savings before Social Security or pensions kick in. A year with unusually low income is a window to convert at a discount.

Conversions also make sense if you have a long time horizon — at least 10 years before you need the money. The longer the money sits in the Roth growing tax-free, the more the tax you paid upfront pays for itself. If you convert at 55 and do not touch the money until 70, you have 15 years of tax-free growth. If you convert at 65 and need the money at 67, the benefit is much smaller.

The pro-rata rule and why it complicates conversions

The pro-rata rule is the biggest trap in Roth conversions. If you own a traditional IRA, SEP-IRA, or SIMPLE IRA, the IRS treats all of them as one pool for tax purposes. When you convert, you cannot pick and choose which dollars to convert — you have to convert a proportional mix of pre-tax and after-tax money.

Here is how it works: suppose you have $100,000 in a traditional IRA (all pre-tax contributions) and $10,000 in after-tax contributions sitting in the same account. If you convert $50,000, the IRS says you are converting 90% pre-tax money and 10% after-tax money. You pay tax on $45,000 of the conversion, even though you only wanted to convert the $10,000 in after-tax money.

This rule applies across all your IRAs combined. If you have a traditional IRA at one bank and a SEP-IRA at another, the IRS counts them together. The only way around it is to roll the pre-tax money into a workplace 401(k) or 403(b) if your employer allows it, which removes it from the pro-rata calculation. After that, you can convert just the after-tax money without triggering tax on the pre-tax portion.

How much tax you will owe on a conversion

The tax on a conversion is straightforward: you pay your ordinary income tax rate on the amount converted. If you are in the 22% federal bracket and convert $50,000, you owe $11,000 in federal tax (plus state tax if your state has income tax). That tax is due when you file your return for the year of conversion.

A large conversion can bump you into a higher tax bracket, which means you pay more tax on the conversion itself and possibly on other income that year. If you are close to a bracket boundary, converting $10,000 instead of $50,000 might keep you in a lower bracket and save money overall.

You can spread conversions across multiple years to manage the tax hit. Converting $20,000 per year for five years instead of $100,000 in one year keeps you in a lower bracket each year and may result in less total tax paid. This strategy is called a ladder conversion and works well if you have time before retirement.

The five-year rule and early access to converted money

After you convert, there is a five-year waiting period before you can withdraw the converted money penalty-free if you are under 59½. The clock starts the year you convert. If you convert in 2024, you can withdraw without penalty starting in 2029 (assuming you are still under 59½).

This rule applies to the converted amount only, not to money you contributed directly to the Roth. If you convert $50,000 and also contribute $7,000 directly to the Roth in the same year, you can withdraw the $7,000 anytime without penalty, but the $50,000 is locked until the five-year period ends.

The five-year rule is separate from the age 59½ rule. Even if you are 60 years old, you still have to wait five years from the conversion date to withdraw converted money without penalty. Once you turn 59½ and the five-year period ends, both restrictions lift and you can withdraw freely.

Conversions and Medicare, Social Security, and financial aid

A conversion increases your taxable income for that year, which can affect other benefits. The amount you convert counts as income on your tax return and may push your Modified Adjusted Gross Income (MAGI) higher, which can trigger higher Medicare premiums or reduce Social Security benefits if you are already collecting.

If you are close to the income thresholds for Medicare premium increases (which start at $97,000 for single filers in 2024, though this changes yearly), a large conversion might cost you more in premiums than you save in taxes. The same applies to Social Security: if you are under full retirement age and still working, conversion income counts toward the earnings limit that reduces benefits.

For families with college-age children, a conversion in the year before the Free Application for Federal Student Aid (FAFSA) is filed can increase the Expected Family Contribution and reduce financial aid. If you have a child starting college soon, timing the conversion for after the FAFSA is filed may preserve aid may be able to access.

Conversions you should avoid

Do not convert if you are in a high tax bracket this year and expect to be in a lower one in retirement. If you are still working and earning $150,000 annually, converting $100,000 will push you into the top bracket and cost far more in tax than you will save later. Wait until you retire and your income drops.

Do not convert if you need the money within five years and are under 59½. The five-year rule and early withdrawal penalty make this expensive. If you are 50 and plan to retire at 55, converting now locks the money away for five years after conversion, which means you cannot touch it until age 60.

Do not convert if you have a large amount of pre-tax IRA money and only a small amount of after-tax money. The pro-rata rule will force you to pay tax on most of the conversion, which defeats the purpose. In this case, rolling the pre-tax money to a 401(k) first is worth exploring.

Frequently Asked Questions

Can I undo a conversion if I change my mind?

You can recharacterize a conversion (move the money back to a traditional IRA) only if you do it before your tax return is due, including extensions. After the deadline, the conversion is permanent. Some people convert, wait to see how the market performs, and recharacterize if the account value drops significantly.

What happens to my required minimum distributions if I convert?

Converting does not change your required minimum distribution (RMD) from the traditional IRA in the year of conversion — you still owe it. However, the amount you convert reduces the balance subject to the RMD calculation. Roth IRAs have no RMD during your lifetime, so converting moves money out of the RMD system entirely.

Can I convert if my income is too high for direct Roth contributions?

Yes. There is no income limit on conversions, only on direct contributions. This is why high-income earners often use the "backdoor Roth" strategy: contribute to a traditional IRA (non-deductible), then immediately convert to a Roth. The pro-rata rule still applies, so make sure you have no other pre-tax IRA balances.

Should I convert before or after I retire?

Converting before retirement while you are still working usually results in a higher tax bill because your income is higher. Converting after retirement, when your income drops, often makes more sense. However, if you expect tax rates to rise significantly, converting while working at today's rates might still be worthwhile.

What if I convert and the market drops right after?

You paid tax on the full amount at the time of conversion, even if the account value falls. If you recharacterize before the tax deadline, you move the money back to a traditional IRA and undo the tax. If you keep the conversion, you are stuck with the tax bill even though the account is now worth less.