The Art and Science of Roth Conversions

One of the most common questions we hear as financial advisors is, “Should I do a Roth conversion?”

Before answering that seemingly simple question, it’s important to establish a clear understanding of what a Roth conversion actually is.

A Roth conversion is the process of moving funds from a pre-tax account—such as a traditional IRA or 401(k)—into a Roth IRA (or Roth 401(k)). Because those pre-tax dollars have never been taxed, the converted amount is treated as taxable income in the year of the conversion.

Why would someone willingly create a tax bill? Typically, the goal is to take advantage of lower tax rates today in exchange for tax-free growth and withdrawals in the future, while also reducing exposure to potentially higher tax rates down the road.

So… Should You Do a Roth Conversion?

As with most financial planning questions, the answer is: it depends.

Some of the key variables include:

• Your current income compared to expected future income
• Anticipated changes in tax law
• Upcoming windfalls (such as business sales, inheritances, or bonuses)
• Timing relative to retirement and required minimum distributions (RMDs)

In many cases, completing Roth conversions during your highest earning years may not be optimal. However, waiting until after RMDs begin may also limit the effectiveness of the strategy. Timing is critical—and we’ll come back to that shortly.

First, let’s explore why Roth conversions can be so powerful.

Roth conversions are fundamentally a tax strategy that can reduce lifetime tax liability if they are done properly but they offer several additional benefits that are often overlooked.

Most savers accumulate the majority of their retirement assets in pre-tax accounts like 401(k)s. While the upfront tax deduction is attractive, the government eventually requires you to take distributions.

• RMDs begin at age 73 (or 75 if you were born in 1960 or later)
• Withdrawals are taxed as ordinary income
• Some retirees are forced to take more income than they actually need

Roth IRAs are not subject to RMDs during the owner’s lifetime. Converting pre-tax dollars to Roth dollars can reduce future mandatory withdrawals and allow assets to grow tax-deferred—and eventually tax-free—for longer.

Before 2020, non-spouse beneficiaries could stretch IRA distributions over their lifetimes, spreading out the tax burden. The SECURE Act changed that.

Now, most non-spouse beneficiaries must empty inherited IRAs within 10 years of the original owner’s death. For many adult children—often in their peak earning years—this can push income into much higher tax brackets.

Roth IRAs are still subject to the 10-year rule, but withdrawals are tax-free. This means:

• Less income tax for heirs
• May help preserve more family wealth
• More flexibility in planning distributions

When we say Roth conversions can be a long-term strategy, we truly mean multi-generational.

A common objection couples raise is, “We’re already in a high tax bracket—why pay even more tax?” That concern is understandable.

However, consider this reality: when one spouse passes away, tax brackets are effectively cut in half for the surviving spouse. The survivor may still face RMDs on the same retirement balances—but now at higher marginal rates.

Having Roth assets provides flexibility, allowing the surviving spouse to:

• Access funds without triggering taxable income
• Better manage tax brackets
• Reduce the risk of unintended tax spikes

It’s not a pleasant scenario to think about, but it’s a very real planning consideration.

By historical standards, today’s tax environment is relatively favorable. While no one can predict future tax law with certainty, some believe that tax rates are more likely to rise than fall over the long term.

Roth conversions allow you to:

• Lock in known tax rates today
• Reduce dependence on future tax policy
• Create greater certainty in retirement planning

Yes, there is some risk—but it’s often an educated and manageable one.

How and When Should You Do a Roth Conversion?

How It Works

Mechanically, Roth conversions are quite simple. You can typically complete them:

• Online through your custodian, or
• With the help of your financial advisor

It’s a simple matter of transferring funds from one account to another.  The more important question is how you pay the taxes.

You generally have two options:

1. Withhold taxes from the conversion
   Example: Convert $10,000, withhold 25% for taxes, and end up with $7,500 in the Roth
2. Pay taxes out of pocket via estimated payments or increased withholding elsewhere

Paying taxes out of pocket is usually preferred because it allows more money to remain invested in tax-advantaged accounts, but this is not always an option that can be achieved due to lack of non IRA funds or other circumstances may prevent it.  Withholding taxes from the conversion can change the math but it can still lead to a better long-term outcome than doing nothing at all.

When Timing Matters Most

In many cases, executing conversions later in the year provides the most precision. By then, we have better visibility into:

• Total income for the year
• Tax bracket thresholds
• Medicare premium cliffs

Waiting allows us to convert “up to” a specific bracket without accidentally crossing a line.

An Important Exception: Market Downturns

Periods of market volatility can create Roth conversion opportunities.

For example:

• Suppose you start the year with a $100,000 IRA
• You have room to convert $20,000
• A market downturn temporarily reduces the account to $70,000

Converting $20,000 during the downturn means a larger percentage of your account moves into the Roth. When markets recover, more of that rebound occurs inside the tax-free environment.

When done correctly, Roth conversions can be a useful long-term planning tool and exercise. They require thoughtful analysis, careful timing, and coordination with your tax situation but the benefits can be substantial.

If you haven’t explored whether this strategy makes sense for you and your family, we’re happy to walk through the numbers and help you understand your options.