When you convert part of a traditional IRA or 401(k) to a Roth, the amount converted is taxed as ordinary income this year. In exchange, future growth and qualified withdrawals are tax-free. Whether that trade is worth it comes down to one question: is your tax rate lower now than it will be later?
The rules that shape every conversion
- No income limit. Anyone can convert, regardless of income.
- No undo. Since 2018, a conversion can't be recharacterized back to a traditional IRA. Once it's done, the tax is owed.
- Calendar-year deadline. A conversion counts for the year it is completed, so December 31 is the practical cut-off.
- The pro-rata rule. If you have after-tax (nondeductible) money in any traditional IRA, each conversion is treated as a proportional mix of taxable and non-taxable dollars across all your IRAs.
- Five-year clock. Converted amounts withdrawn within five years can face a 10% penalty if you're under 59½.
Where the best windows usually are
The most valuable conversion years are ones where your income is temporarily low compared with the rest of your life:
- Early retirement. The years between leaving work and starting Social Security and required minimum distributions are often the lowest-income years a high earner will ever have.
- A sabbatical, sale or business transition. A year with little earned income, or a large deductible loss, can open room in lower brackets.
- Before a move. Converting after moving from Oregon or California to Washington, which has no income tax on wages or IRA distributions, can remove the state tax entirely.
- A market drawdown. Converting when account values are down moves more shares into the Roth for the same tax bill.
Watch the side effects
The income from a conversion doesn't just affect your bracket. It can also:
- Raise Medicare premiums through IRMAA surcharges, based on income from two years earlier.
- Trigger the 3.8% net investment income tax on investment income by pushing modified AGI above the threshold.
- Reduce income-based deductions and credits, and phase down the higher SALT deduction cap for incomes above roughly $500,000.
- Push long-term capital gains and qualified dividends into higher rate tiers.
Pay the tax from outside the IRA
A conversion works best when the tax is paid from a taxable account. Withholding the tax from the IRA itself shrinks the amount that reaches the Roth, and if you're under 59½, the withheld portion can be treated as an early distribution subject to penalty.
Think about who will pay later
Most non-spouse heirs must now empty an inherited IRA within ten years, often during their own peak earning years. If your children are likely to be in high brackets, converting at your lower rate can leave them more after tax. A Roth is also one of the cleanest assets to leave to the next generation.
The bottom line
The right conversion amount is rarely all or nothing. It's a number we solve for each year, using a projection that weighs this year's bracket against your expected future rates, Medicare thresholds, state taxes and your estate plan.
This article is general information, not tax, legal or investment advice for your situation. Rules and thresholds change, so please talk with a qualified advisor before acting.
