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Roth Conversions: What You Need to Know Thumbnail

Roth Conversions: What You Need to Know

If you are close to retirement or already retired, it is important to protect your wealth from unnecessary taxes. A crucial part of any financial plan is tax planning. Taxes in retirement can take on various forms and can take away from the comfortable, secure, and fun retirement that you have carefully planned over the years. 

When it comes to your taxes, there are a lot of strategies out there that could put some cash back in your pocket or benefit your heirs after you pass away. One of the most important and popular tax planning strategies is a Roth conversion. This tax reduction strategy simply means you are converting an IRA to a Roth IRA. 

But before you rush into this decision, you need to really understand what this conversion means, what the conversion process is, and how it works. 

Hence, today I am going to explain what a Roth Conversion is and how to complete one.

 What you will learn:

  • What is a Roth Conversion?
  • Benefits of a Roth Conversion
  • 5 Considerations to Make Before Doing a Roth Conversion
  • How to Make a Roth Conversion


A Roth conversion refers to the act of converting a traditional IRA account into a Roth IRA account.

A traditional IRA account is created using pre-tax dollars, meaning the distributions you take from a traditional IRA account in retirement are taxed as ordinary income. A Roth IRA is created using after-tax dollars, meaning the distributions you take from a Roth IRA account in retirement are tax-free (because tax has already been paid). 

A Roth IRA conversion can be advantageous if you have a large traditional IRA account and you expect your future tax bills to either stay at the same level or grow when you start to withdraw from retirement savings. 

Additionally, a Roth IRA can be an appealing option for some because it does not include required minimum distributions. This means that you can continue to save and grow tax-free dollars for the remainder of your life. 


While a Roth conversion is not for everyone, there are some benefits attached to this conversion. Let’s look at some of them below:

1.  Watch your money grow tax-free for longer - Apart from the fact that a Roth IRA offers you the benefit of tax-free withdrawals, you can also leave your money in the account and let it keep growing tax-free.

2.  Leave a tax-free inheritance to your heirs - A Roth IRA can be left as an inheritance to your heir(s). The people who inherit your Roth IRA will have to take RMDs, but they won't have to pay any federal income tax on their withdrawals as long as the account has been open for at least 5 years.

 3. A “backdoor” conversion can get you into a Roth IRA—even if your income is too high - A Roth IRA can be obtained even if your income is “too high” by using a 2-step process, often referred to as a "backdoor" strategy. You will first have to place your contribution in a traditional IRA—which has no income limits. Then, move the money into a Roth IRA using a Roth conversion.  It is very important to understand the consequences before using this strategy.

Saving for retirement


While a Roth conversion could be a great option for some, it could be a costly mistake for others. There are consequences that come with this conversion and without the proper knowledge; this conversion can hurt you more than it helps you. To help you avoid this, I have outlined five important considerations to make before converting your traditional IRA into a Roth account.

Consideration #1: Your Timeline to Retirement

If you’re retiring within the next few years, and need your Roth money to live on for the next 5 years you may want to forego a Roth conversion. A common concern with this is that if withdrawals are made before five years have passed--that means exactly twelve months from when it was originally converted--you'll be hit with penalties of up to 10% as well as additional income taxes. To help figure out whether or not conversion seems like an attractive option for you, try using one of these handy Roth conversion calculators.

You don’t want to rely solely on a Roth conversion calculator since the assumptions are based on future income tax expectations. It is difficult to predict where income tax rates are headed in the next one to two or even twenty or thirty years from now when you may be taking funds from your Roth IRA. 

You must also review your current and projected income tax bracket before converting a traditional IRA to a Roth IRA. To do this, you can use information from your most recent tax return to determine your marginal tax bracket. Then, complete a budget plan for retirement to estimate your anticipated tax bracket based on your projected retirement income plan.

Consideration #2: Tax Obligations

When considering a Roth conversion, you simply can’t ignore the tax implications associated with this move. While your aim may be tax-free income in retirement, you will have to pay taxes on that income at some point. You need to be prepared to pay the taxes on this additional income, which could very well push you up into a higher tax bracket.

While it’s possible to cover the difference using a portion of the distribution itself, this is typically not advised because you’d be robbing your future retirement of income.

Consideration #3: Do I Want to Pay the Taxes?

Sometimes making a good financial move can be difficult, especially when it comes to considering a Roth IRA conversion. Imagine having $300,000 in an IRA and right upfront, you’re giving up $75,000 of that IRA. A Roth IRA conversion often looks better on paper than in real life.  You actually have to write a check to the U.S. Treasury. 

Taxes in Retirement

Consideration #4: Your Future Tax Bracket

One of the main reasons an individual chooses to do a Roth conversion is for the advantage of tax-free withdrawals in retirement. With that in mind, you’ll want to take into consideration whether your tax bracket will be higher or lower in the future when you anticipate withdrawing the funds.

If you believe you’ll be in a lower tax bracket come retirement, it may be worth waiting to withdraw the funds then. On the other hand, if you’ve experienced a year of interrupted or lowered income (lost a job, missed out on a bonus, etc.), you may be in a lower tax bracket now than you would when entering retirement.

If you believe you will retire in a lower income tax bracket than you are now, it doesn’t make sense to convert. You will pay higher taxes on the conversion than you would if you were to withdraw the money from your traditional IRA at retirement.

Consideration #5: How Much to Convert and When

If you’re on the cusp of a higher tax bracket, but still want to do a Roth conversion, you do have the option to convert a portion at a time. By spreading the conversion across several years (as opposed to one lump sum), you can lower your yearly tax obligation. 


 The IRS offers three possible ways for an individual to convert funds from a traditional IRA into a Roth IRA account. These methods include: 

  • Rollover: You are given existing traditional IRA funds by the trustee and you put them into a Roth IRA account within 60 days. Any such conversions should be done with due diligence, possibly consulting a financial planner or personal tax professional, as there may be major tax implications if not done appropriately. This is even more important because a Roth conversion completed after Dec. 31, 2017, can no longer be recharacterized—in other words, it can't be reverted to a traditional IRA later.
  • Trustee-to-trustee transfer: The institution currently housing your traditional IRA transfers the distribution to a different institution where it'll be held in a Roth IRA. 
  • Same trustee transfer: The institution currently housing your account transfers your traditional IRA funds into a Roth IRA account at their firm.


A Roth Conversion can be one of the most powerful tax planning strategies in retirement. Being able to withdraw tax-free income in retirement is an appealing option for many. And it’s good to know that while you may have chosen to open a traditional IRA years ago that you have the option to convert it at any time. 

Before making any moves to your retirement savings account, make sure to speak with your financial advisor first. Together, you can go over these important considerations in regards to your unique financial situation.

If you’re seriously considering a Roth conversion, consult a financial or tax advisor. Here at Gudorf Financial, we can determine what options you have based on your timeline to retirement, tax obligations, your future tax bracket, and anything else relevant to your situation. You don’t have to go at it alone, so shoot us an email or give us a call and we’ll be more than happy to assist you.

👉 If you would like to get a FREE retirement assessment, click the link to schedule your 20-minute call to start the retirement assessment process.

Disclosure - Parts of this article were written by Twenty Over Ten