Roth Conversions: When Paying Taxes Today Might Save You Later

Written by Chris DeVito

Over the past few years, one question has been coming up more and more in conversations with clients:

“Should I convert some of my IRA or 401(k) to a Roth?”

With uncertainty around future tax rates and many investors holding significant balances in pre-tax retirement accounts, Roth conversions have become a popular strategy. But the reality is that the answer is rarely straightforward.

A Roth conversion can be a powerful tool, but only when the timing and circumstances make sense.

Let’s walk through how Roth conversions work, their pros and cons, and the situations where they may (or may not) be worth considering.

What Is a Roth Conversion?

A Roth conversion occurs when you move money from a traditional pre-tax retirement account (like a Traditional IRA or pre-tax 401(k)) into a Roth account.

When you do this:

• The amount converted is taxed as ordinary income in the year of the conversion
• Once inside the Roth, future growth is tax-free
• Qualified withdrawals in retirement are also tax-free

In simple terms:

You pay taxes now so you don’t have to pay them later.

But that decision requires careful analysis.

When you convert, you're effectively taking a “tax haircut” today in exchange for the possibility of tax-free growth in the future.

Why Roth Conversions Are Getting More Attention

Several trends have pushed Roth conversions into the spotlight:

• Rising government debt and the possibility of higher future tax rates
• Investors accumulating large pre-tax retirement balances
• The elimination of the “Stretch IRA” for most heirs
• Greater awareness around tax diversification

For many high earners, especially professionals approaching retirement, the question becomes:

Is it better to pay taxes now while rates are known, or defer taxes into the future when rates may be higher?

The answer depends on a number of factors.

Key Variables That Determine Whether a Roth Conversion Makes Sense

Before converting, several questions need to be considered:

1. Your Current Tax Bracket vs. Future Tax Bracket

This is the single most important factor.

If you believe your future tax rate will be higher than today, converting may make sense.

Common scenarios:

• Income drops in early retirement before Social Security or RMDs
• Temporary tax windows before large income events
• Anticipated tax rate increases

If your future tax rate is lower, converting could actually make things worse.

2. How Long the Money Can Stay Invested

Roth conversions work best when the funds have time to compound tax-free.

If you convert and withdraw the money shortly afterward, the benefit disappears.

Generally speaking:

• The longer the money stays in the Roth
• The more powerful the tax-free growth becomes

This is why Roth conversions are often considered during early retirement years or mid-career planning windows.

3. Your Retirement Income Picture

Future income sources matter.

Consider whether you will have:

• Pensions
• Rental income
• Business income
• Social Security
• Required Minimum Distributions (RMDs)

Large RMDs later in retirement can push retirees into higher tax brackets, making Roth conversions earlier in life more attractive.

4. How You Pay the Tax Bill

This is an overlooked but critical factor.

Ideally, the taxes on a conversion should be paid with cash outside the retirement account.

Why?

Using retirement funds to pay the tax reduces the amount that can compound tax-free.

The Pros of Roth Conversions

1. Tax-Free Growth

Once money is inside the Roth, future growth is completely tax-free.

For investors with long-term horizons, this can create significant value.

2. No Required Minimum Distributions

Traditional IRAs require withdrawals starting at age 73.

Roth IRAs do not have required minimum distributions, allowing money to continue growing tax-free. 

3. Tax Diversification

Having a mix of:

• Taxable accounts
• Pre-tax accounts
• Roth accounts

gives retirees more flexibility to manage their tax brackets year by year.

4. Estate Planning Benefits

Heirs inherit Roth IRAs income-tax free, which can make them an efficient wealth transfer vehicle.

While beneficiaries must still follow distribution rules, the withdrawals themselves are typically tax-free.

The Cons of Roth Conversions

1. Immediate Tax Bill

The biggest downside is simple:

You must pay taxes now.

Depending on the size of the conversion, this could push you into a higher tax bracket.

2. Loss of Compounding on Taxes Paid

The money used to pay the tax could otherwise have remained invested.

This is the “tax haircut” mentioned earlier. 

3. Risk of Converting at the Wrong Time

If you convert while in a high tax bracket, but your future bracket ends up lower, you may have paid more tax than necessary. 

4. Potential Impact on Other Planning Areas

Large conversions can affect:

• Medicare premium surcharges (IRMAA)
• Taxation of Social Security
• College financial aid calculations

When Roth Conversions Often Make Sense

Roth conversions tend to work best in situations like:

1. Early Retirement Tax Windows

The period between retirement and age 75 (when RMDs begin) can be a low-income window ideal for conversions.

2. Temporary Income Drops

For example:

• Between jobs
• Business transition years
• Sabbaticals or reduced workload

3. When Large Future RMDs Are Expected

If your retirement accounts are large enough that RMDs will push you into higher tax brackets later.

4. Estate Planning Goals

Individuals who want to leave tax-free assets to heirs may benefit from shifting assets into Roth accounts.

When Roth Conversions May Not Make Sense

Conversions may be less attractive when:

• You are currently in a very high tax bracket
• You expect your income to drop significantly in retirement
• You will need the converted funds in the near future
• You do not have outside cash to pay the tax bill

An Alternative: Roth 401(k) Contributions

For those still working, there may be another option.

Many employer plans now offer Roth 401(k) contributions.

Instead of converting existing balances, you can simply start making new contributions on a Roth basis.

This allows you to build tax-free assets without triggering a conversion tax bill today.

The Final Verdict?

Roth conversions can be a highly effective tax-planning strategy, but they should rarely be done blindly.

The right decision depends on several variables:

• Current vs. future tax rates
• Time horizon
• Retirement income structure
• Cash available to pay taxes

In many cases, the optimal approach isn’t an all-or-nothing decision.

Instead, it may involve strategic partial conversions over multiple years to fill lower tax brackets while avoiding unnecessary tax spikes.

For investors with significant retirement savings, thoughtful tax planning around Roth conversions can potentially reduce lifetime taxes and increase after-tax wealth.

But the key is making sure the strategy aligns with your broader financial plan.

8812076RG_Mar28