Should I do a Roth Conversion?
🔄 Should I Do a Roth Conversion? A Practical Guide
“Should I convert to a Roth?” is one of the most common retirement questions I hear — and usually one of the most misunderstood.
At first glance, a Roth conversion sounds like a no-brainer:
👉 Pay tax now
👉 Enjoy tax-free withdrawals later
But the reality is more nuanced. A Roth conversion can be incredibly powerful or unnecessarily expensive, depending on your income, timing, and long-term plan.
Let’s break it down.
💡 What Is a Roth Conversion?
A Roth conversion is the process of moving money from a tax-deferred retirement account into a Roth account, such as:
Traditional IRA
401(k), 403(b), or 457 plan
Certain annuities
You can convert using:
Direct (trustee-to-trustee) transfer — the cleanest method
Indirect conversion — you receive the funds and redeposit them within 60 days (riskier and rarely recommended)
⚠️ Important:
The converted amount is taxable income in the year of conversion
There are no income limits to do a conversion
RMDs and inherited IRAs cannot be converted
🤔 Is a Roth Conversion Always a Good Idea?
Not necessarily.
Many planners love Roth conversions because:
✔️ Future withdrawals can be tax-free
✔️ Roth accounts don’t have RMDs during your lifetime
✔️ They offer flexibility for estate planning
But the downside is very real:
❌ You must pay the tax now
❌ Large conversions can push you into higher tax brackets
❌ Poor timing can create avoidable tax bills
The key question isn’t “Will taxes be higher later?”
It’s “What tax rate am I paying on this conversion today?”
📘 Example: Full Roth Conversion Gone Wrong
Let’s look at a simplified example.
Jim is single and earns $78,000 a year.
Over time, his 401(k) has grown to $270,000.
When Jim leaves his job, he considers two options:
1️⃣ Roll the funds into a Traditional IRA
2️⃣ Convert the full amount to a Roth IRA
Option 1: Traditional IRA Rollover
No tax due now. Funds remain tax-deferred. Clean and simple.
Option 2: Full Roth Conversion
Jim’s taxable income jumps from $78,000 to $348,000.
Result?
He’s pushed into much higher tax brackets
Federal tax on the conversion alone could exceed $80,000
That’s more than Jim earns in an entire year
That’s not tax planning — that’s tax shock.
🚨 Why Withholding Makes It Worse
Many people assume they can “just withhold the tax” from the conversion.
That’s usually a mistake.
Trustee-to-trustee transfers don’t withhold by default
Indirect conversions may withhold up to 20%
Any withheld amount is treated as a distribution, not a conversion
If you’re under 59½, that withheld amount can also trigger:
❌ Income tax
❌ A 10% early withdrawal penalty
Now your tax bill just got even uglier.
⚖️ A Smarter Strategy: Partial Roth Conversions
Instead of converting everything at once, many taxpayers are better served by partial Roth conversions.
For example:
Convert $25,000–$50,000 per year
Fill up a lower tax bracket without spilling into higher ones
Spread the tax cost over multiple years
This approach:
✔️ Controls tax brackets
✔️ Preserves cash flow
✔️ Reduces long-term tax exposure
📌 Keep in mind:
Each conversion has its own five-year clock for penalty-free withdrawals, so tracking matters.
🧠 When a Roth Conversion Can Make Sense
A Roth conversion may be a strong strategy if:
You’re in a temporarily low tax year
You expect a significantly higher income later
You have cash outside retirement accounts to pay the tax
You want to reduce future RMDs
Estate planning is a priority
But it should almost never be done blindly or all at once.
📝 Final Thoughts
Roth conversions are not inherently good or bad — they’re tools. Used strategically, they can create tax-free retirement income and long-term flexibility. Used carelessly, they can generate massive, unnecessary tax bills.
Before converting a single dollar, you should know:
✔️ Your current marginal tax rate
✔️ How much room do you have in each bracket
✔️ Whether partial conversions make more sense
✔️ How the conversion fits into your broader tax plan
If you’re considering a Roth conversion and want real numbers — not guesswork — I can help.
👉 Book a call with Lisa Brugman, EA & Associates
Let’s decide if a Roth conversion belongs in your strategy — and if so, how to do it the smart way.
