Roth conversion

Moving money from a pre-tax retirement account to a Roth account, paying income tax now in exchange for tax-free qualified withdrawals later.

What it means

A Roth conversion transfers money from a traditional IRA, or similar pre-tax account, into a Roth IRA. The pre-tax amount converted counts as taxable income that year, but future qualified withdrawals, including growth, are tax-free and Roth IRAs have no required minimum distributions for the original owner. There is no income limit on converting.

Each conversion has its own five-year clock: withdrawing converted amounts within five years before age 59½ can trigger the 10% penalty. Conversions are permanent; recharacterization, which once allowed undoing them, ended for conversions after 2017. A large conversion can push income into higher brackets and raise income-based costs such as Medicare premiums, so many people spread conversions over several years.

Example

Suppose someone converts $40,000 from a traditional IRA in a year when that income falls in a hypothetical 22% bracket. The conversion adds about $8,800 to that year’s tax bill.

How it’s used

Low-income years such as early retirement or a career break
Reducing future required minimum distributions
Leaving tax-free accounts to heirs

Strengths and weaknesses

Strengths

Future qualified withdrawals are tax-free
Reduces future required minimum distributions
Can lock in today’s tax rate

Weaknesses

Creates a tax bill in the year of conversion
Cannot be undone
Can raise income-based costs and reduce some credits
Pays off less if tax rates later fall

Good to know

Paying the tax from money outside the account leaves more in the Roth to grow.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.