Roth Conversions Explained

One topic that often comes up in my work as a financial planner is Roth conversions. It’s a strategy many people hear about but don’t always fully understand. In this article, I want to break down what a Roth conversion is, why someone might consider it, and how it can fit into a broader financial plan. 

Historically, one of the most common reasons people explored Roth conversions was the expectation that tax rates would increase in the future. That concern was well founded for many years, as individual income tax rates were scheduled to rise after 2025 under the sunset provisions of the Tax Cuts and Jobs Act. However, with the passage of the One Big Beautiful Bill Act in July 2025, current individual income tax rates were made permanent, subject to future Congressional changes. 

While that removed a known deadline, it did not eliminate tax planning opportunities. Roth conversions remain a powerful tool when used thoughtfully and in coordination with your overall financial and tax picture. 

As with any planning strategy, I strongly encourage working closely with your financial advisor and CPA before moving forward. The goal is to avoid unexpected tax consequences and ensure the decision aligns with both short-term cash flow and long-term goals. 

How Traditional Retirement Accounts Work 

Let’s start with a common scenario. 

You spent your career working and saving for retirement, contributing to a workplace retirement plan such as a 401(k) that allowed pre-tax contributions. Those contributions reduced your taxable income during your working years, with the expectation that you would be in a lower tax bracket once you retired. 

Over time, those accounts grew, and when you retired, much of your wealth was held in traditional IRAs funded with pre-tax dollars. Every dollar withdrawn from these accounts is taxed as ordinary income. 

For many retirees, income sources such as Social Security, pensions, required minimum distributions (RMDs), and investment income can result in higher-than-expected tax bills. That’s often where Roth conversions come into the conversation. 

What is a Roth Conversion? 

A Roth conversion occurs when funds are moved from a traditional IRA into a Roth IRA. 

Here’s how it works: 

• A distribution is taken from the traditional IRA 

• The amount converted is included as taxable income for that year 

• Taxes are paid on the converted amount 

• The net funds are deposited into a Roth IRA 

Once inside the Roth IRA, future qualified withdrawals are tax-free, meaning no ordinary income or capital gains taxes are owed. 

This allows you to effectively “lock in” today’s tax rate on the converted funds and create a pool of assets that can grow and be distributed tax-free in the future. 

Roth IRAs can also be an effective estate planning tool. While beneficiaries are still subject to required distribution rules, those distributions are generally income-tax free, which can significantly reduce the tax burden on heirs. 

The trade-off, of course, is that the conversion increases taxable income in the year it occurs. This is why timing and amount matter, and why planning is essential. 

How Roth Conversions Are Typically Implemented 

When evaluating a Roth conversion, we look closely at current income and tax brackets. 

For example, consider a married couple with $150,000 of taxable income in a given year. That places them in the 22% federal tax bracket, with approximately $50,000 of room before moving into the next bracket. 

They could choose to convert $50,000 from a traditional IRA to a Roth IRA: 

• $50,000 is added to taxable income 

• Approximately $11,000 in federal taxes is due (at the 22% bracket, ignoring state taxes) 

• Roughly $39,000 is deposited into the Roth IRA 

At first glance, it may feel uncomfortable to pay taxes now and see a smaller account balance immediately afterward. However, the long-term benefit is that those funds can grow tax-free, and future withdrawals will not increase taxable income. 

When Roth conversions are done strategically over multiple years, they can meaningfully reduce future RMDs and provide greater tax flexibility throughout retirement. 

Partial vs. Full Conversions and Estate Considerations 

You are not required to convert an entire IRA balance at once. In fact, partial conversions over time are often more effective from a tax standpoint. 

In some cases, families with very large IRA balances may intentionally choose to convert larger amounts, even at higher tax brackets, as part of a broader estate planning strategy. While this approach is not appropriate for everyone, it can reduce the future tax burden on children or grandchildren who may otherwise inherit large pre-tax accounts during their highest earning years. 

Is a Roth Conversion Right for You? 

There is no one-size-fits-all answer. 

I often encourage clients to think about retirement assets in three “buckets”: 

1. Tax-deferred: traditional IRAs and 401(k)s 

1. Taxable: brokerage accounts held individually, jointly, or in a trust 

1. Tax-free: Roth IRAs 

Having assets across all three buckets provides flexibility and control over taxable income in retirement. 

There are also many reasons someone may decide not to pursue a Roth conversion right away, including: 

• Higher current income 

• Cash flow constraints 

• An upcoming liquidity event, such as the sale of a business 

• Anticipated future tax deductions or losses 

For others, lower-income years, early retirement, or the years before RMDs begin can be an ideal window for conversions. 

Additionally, under current law, non-spouse beneficiaries must generally withdraw inherited IRA assets within 10 years. If those beneficiaries are still in their peak earning years, inherited pre-tax IRAs can result in substantial taxes. Roth assets can help mitigate that impact. 

Final Thoughts 

Roth conversions can be a powerful planning tool, but they should never be done in isolation. The decision affects taxes today, future income planning, and legacy goals. 

If you’re considering a Roth conversion, talk with your team of advisors to evaluate both the short-term tax impact and the long-term benefits for you and your family. 

Thoughtful planning today can create greater flexibility, clarity, and confidence in the years ahead.