Key Takeaways:

• Converting a traditional IRA or 401(k) to a Roth account triggers taxable income in the year of conversion, but qualified withdrawals afterward are tax-free.
• The strategy works best when you convert during a lower-income window, such as early retirement before Social Security and RMDs begin.
• Converting gradually — enough each year to stay within your current tax bracket — helps avoid a large one-time tax bill.
• Higher income from a conversion can raise Medicare Part B/D premiums two years later through IRMAA surcharges.
• Paying the conversion tax with money outside the retirement account, rather than from the converted funds themselves, preserves more of the balance for tax-free growth

If much of your retirement savings are held in a traditional IRA or 401(k), you could get a significant tax surprise when you start making withdrawals. A Roth account, on the other hand, offers tax-free qualified withdrawals.

But don’t convert to a Roth account simply because tax-free income sounds better than taxable income. After all, you’re paying for that future tax benefit upfront. With a Roth conversion, you pay income tax on the money you convert in the year you convert it. Whether that upfront tax bill is worth it depends on your income, tax bracket, and retirement plans.

How a Roth Conversion Works

A Roth conversion shifts money from a traditional IRA or 401(k) into a Roth account. When you convert from these pre-tax accounts, the amount converted generally counts as taxable income that year. For example, if you convert $50,000, you could add $50,000 to your taxable income.

Once the money is in the Roth account, however, it can grow tax-free. Qualified withdrawals are also tax-free. And unlike traditional IRAs, Roth IRAs don’t require the original account owner to take required minimum distributions (RMDs).

Why Your Tax Rate Matters

The basic goal of a Roth conversion is to pay taxes when your rate is relatively low rather than waiting and potentially paying a higher rate later.

For instance, if you recently retired, you may be in a lower tax bracket than you will be once Social Security and RMDs begin. That lower-income window could be an ideal time to consider a Roth conversion.

On the flip side, if you’re currently earning a high salary but expect a significant drop in taxable income after retirement, paying taxes on a conversion now may not be the right move.

Your income, tax bracket, retirement timeline, and future income sources all need to be considered when thinking about a Roth conversion.

Don’t Convert All at Once

Converting too much at once could create a large tax bill. It could also push some of your income into a higher tax bracket. Instead, convert just enough each year to keep within your current tax bracket. This method prolongs the process, but it keeps your tax bill under control. However, it isn’t something you want to guess at. A tax professional can help you figure out the right approach for your situation.

Watch for Medicare Costs

Medicare Part B and Part D premiums are based on your income from two years back. If a Roth conversion boosts your income, you may pay an income-related surcharge known as IRMAA (income-related monthly adjustment amount). This can trigger higher Medicare premiums.

Know When a Conversion May Not Pay Off

There are a couple of circumstances where a conversion may not be the right move:

1. If you expect to be in a lower tax bracket later
2. If you need to withdraw the converted money soon rather than giving it time to grow

You also need to consider how you’ll pay the conversion tax. Ideally, you want to use money outside of your retirement accounts so the full converted balance remains untouched.

Whether a Roth conversion makes sense depends on your current income, your future income, and how long the money can grow. Everyone’s circumstances are different, and there is no one-size-fits-all approach here. Talk to a tax professional who can help you tackle the numbers and come up with a plan.