Is a Roth IRA Conversion a Good Option for You?

It's safe to say that Roth IRAs are among the very finest options for saving for retirement. In addition, you can convert other retirement accounts to add to your Roth IRA. You can avoid having to take money out of your retirement account, increase your investment possibilities, and reduce your tax liability all by converting to a Roth IRA. If you want to know if switching to a Roth IRA is a good idea, read on.

Is a Roth IRA Conversion a Good Option for You?

Is a Roth IRA Conversion a Good Option for You?


A Roth IRA is one of the best retirement accounts available, and for good reason.

Roth IRAs are favored by financial experts due to their tax-free income, ability to leave funds to heirs tax-free, and overall financial flexibility in retirement. In 2022, you can contribute up to $6,000 to your Roth IRA if you're under 50 (or $7,000 if you're over 50), as long as you stay within the income limits, and in 2023, you can contribute up to $6,500 if you're under 50 and $7,500 if you're 50 or older. And even if you aren't, there is still a way to benefit from this retirement account.

There are workarounds for getting more money into your Roth IRA, such as converting money from other retirement accounts. A Roth IRA conversion, depending on your situation, can provide you with tax-free growth, more investment options, and a way to avoid being forced to take money out when you don't want or need to.

Continue reading to see if a Roth IRA conversion is right for you.

What Exactly is a Roth IRA?

A Roth IRA is a retirement account that is funded with after-tax dollars. It grows tax-free, and when you take distributions in retirement, you don't have to pay taxes on them. It's a fantastic vehicle for saving.

To contribute up to the $6,000 maximum this year, your Modified Adjusted Gross Income (MAGI) must be less than $144,000 for the tax year, or less than $214,000 if married or filing jointly. If your income exceeds those limits, a backdoor Roth IRA is a good way for you to reap the benefits of a Roth IRA. 

Source: Vincere Wealth

What is a Roth IRA Conversion?

A Roth IRA conversion is exactly what it sounds like: you transfer your retirement savings from a traditional IRA to a Roth account. This effectively allows you to pay your tax bill sooner rather than later.

Every dollar you convert to a Roth IRA will enjoy the tax-free growth and other benefits offered by these accounts. Regardless of how much your Roth IRA appreciates, you won't owe a dime in taxes in retirement. However, you will be able to withdraw all of the money you convert without penalty between now and then, as long as it has been at least five years since you converted it. You'll also avoid having to make mandatory minimum withdrawals, also known as required minimum distributions (RMDs), once you reach the age of 72. This allows your money to grow for an even longer period of time.

For example: Instead of letting a $100,000 traditional IRA grow and owing RMDs on a larger balance years from now, you could spend $25,000 today to convert it.

Related: 2022 Financial Year-End Checklist

Advantages of a Roth Conversion

Once you convert your traditional IRA to a Roth IRA, you have more options for tax planning in retirement:

1. Free Yourself from RMDs

Once you reach the age of 72, you must begin RMD withdrawals from your traditional IRA. It makes no difference if you need the money or not. The IRS requires the withdrawal so that it can collect income tax on the money. Converting to a Roth IRA allows you to avoid this, allowing you, if you so choose, to leave all growth to your heirs.

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2. Tax-Free Withdrawals

The money you convert (and pay tax on) can be withdrawn at any time and at any age without requiring you to pay income tax. However, if you are under the age of 59 1/2 when you convert, you must wait five years to avoid a 10% early withdrawal penalty. This is true for each conversion you make. So, if you do a Roth conversion twice, each in a different year, you will have two five-year clocks ticking. Another five-year rule to remember is that your first Roth account must have been funded at least five years ago in order to qualify for tax-free earnings withdrawals. This is true no matter how old you are, but your withdrawal must qualify in general, either because of your age or because you have an approved exemption, to avoid paying taxes on earnings.

3. Smaller RMDs on Your Other IRAs

You are not required to convert all of the funds in a traditional IRA to a Roth IRA. Partial Roth conversions are frequently the most tax-efficient option (more on this later). Whatever you convert before the age of 72 leaves less money in your traditional IRA, which effectively means less money to take as RMDs later.

4. Reduced Taxable Income

Any money you take out of your retirement account after reaching the RMD age is considered income. Reducing your RMD burden means having less taxable income in retirement, which can help you manage other retirement expenses. Your Medicare Part B premium, as well as whether and how much tax you owe on Social Security benefits, are determined by your taxable income.

5. Hedge Against Higher Taxes in Retirement

If you think that your annual income from retirement sources, like RMDs from traditional accounts, Social Security, and maybe even a pension, won't be much less than what it is now, you are less likely to be in a lower tax bracket in the future. This could increase the appeal of converting now, paying the tax, and then enjoying tax-free future growth. Even though it is impossible to know what your tax rate will be when you retire, let alone five, ten, or twenty years into your retirement, it is smart to protect some of your retirement savings from the possibility of higher tax rates.

6. Easier on Your Heirs

Almost everyone who inherits an IRA, aside from a spouse, must empty the account within ten years of your passing. If they have a large traditional IRA, they may face tax complications. In 10 years, they will be required to withdraw all funds from an inherited Roth IRA, but they will not owe tax, and it will not affect their taxable income level.

Disadvantages of a Roth Conversion

There are a few compelling reasons to avoid a Roth conversion:

1. You Expect Your Income to be Lower in Retirement

Paying the tax on a Roth IRA conversion may not make sense if you are currently in a high tax bracket.

2. You Don’t Have the Cash to Cover the Tax Bill

You don't want to pay the tax with money from the Roth IRA conversion. The goal should be to keep that money growing tax-free for as long as possible. You should also not prioritize a Roth IRA conversion if you have high-interest credit card debt or need to dip into your emergency fund.

3. You Plan on Moving to a State with Lower Taxes

If you currently live in a state where the conversion will be taxed and plan to relocate to a state that does not tax retirement income, it may make sense to postpone the conversion until you have relocated.

4. You Plan on Applying for College Financial Aid

Money in a retirement account has no bearing on financial aid. However, the conversion amount will appear on your tax return as income the year you convert. This may have an impact on your family's financial aid package.

Related: Connect with College Funding Hero if you have any questions regarding financial aid. 

Is a Roth Conversion Right for You?

It all depends on your objectives...

Here are six common reasons why converting a Roth IRA makes sense:

1. You Anticipate a Higher Tax Bracket in the Future

If you expect your income to rise in the future, a Roth IRA conversion is a good way to convert funds at your current tax rate and then withdraw them tax-free in retirement.

2. You Need More Diversity

If you already have a traditional IRA or 401(k), adding a Roth IRA to the mix can help you manage your future income and tax brackets. Remember that Roth IRAs do not have required minimum distributions, which means you are not required to take money out at a certain age like other retirement accounts, so you can use the money to supplement your lifestyle without increasing your tax burden.

3. You Want to Take Advantage of Market Dips

When the market falls, your shares lose value, providing an opportunity to convert them to a Roth IRA for less tax. Then, when the market recovers, your shares will grow tax-free until you're ready to sell later.

4. Your Income is Lower This Year

If your business is having a slow year and you find yourself temporarily in a lower tax bracket, now could be a good time to convert funds to a Roth IRA because those conversion dollars are taxed at your ordinary income rate. This is especially true if you believe your tax bracket will increase the following year. 

5. You Want to Protect Yourself Against Future Tax Increases

Lawmakers write new bills all the time. Nothing prevents the government from raising taxes or changing the tax rules for Roth IRAs during our lifetimes. By committing your funds early, you can give your money more time to grow and, hopefully, avoid future tax increases.

6. You Want to Give Your Heirs a Tax-Free Gift

Unlike other inheritances, your heirs will not pay taxes when they withdraw from a Roth IRA, so there are no tax consequences for them. Converting your funds to a Roth IRA means that more of your money will go directly to your beneficiaries rather than being used to pay taxes.


A Roth IRA conversion, on the other hand, makes little sense if you're close to retiring, your taxable income would skyrocket, or you don't have the cash on hand to pay the income tax upfront. In these cases, converting would most likely be detrimental to your financial plans. Always consult a tax expert to determine if it makes sense for your situation. 

How to Manage Roth IRA Conversion Taxes?

Given all of the moving parts, it is well worth considering working with a tax professional or financial advisor who understands all of the moving parts. You might want to think about a plan that limits the amount of money you can convert in any given year to an amount that won't put you in a higher tax bracket. If you retire before the age of 72 and have a lower income, those years can be ideal for converting traditional IRA funds to Roth IRA funds.

You can also discuss ways to offset the tax due on the conversion if you work with a financial advisor. One option is to harvest losses on investment accounts. If you itemize your federal tax return, you may want to consider putting more charitable giving—which qualifies as a tax deduction—into a tax year when you will have more taxable income as a result of a Roth IRA conversion.

Contact Vincere Tax, our affiliate firm, and start saving money with your taxes here

Wrapping Up: 

Converting funds from a traditional IRA to a Roth IRA can help you better manage your tax bill in retirement and position you to leave a more manageable financial legacy to your heirs. When and how much to convert in a given year must be carefully considered because the conversion will increase your taxable income for that year. If you're thinking about converting your Roth IRA, you should talk to a financial advisor or tax professional who specializes in Roth IRA conversions.


I hope this information was helpful. If you have any questions, feel free to reach out. I’d be happy to chat with you. 

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About the Author

As Managing Partner of Vincere Wealth, Josh assists clients in navigating financial challenges and making sound financial decisions. Having someone guide you in making sensible financial decisions today can have a substantial impact on your future financial wellbeing. Josh takes great pride in guiding customers through the complexities of taxes, real estate, businesses, employer stock, and international financial planning.

If you're interested in an investment advisory or financial planning relationship, please consider Vincere Wealth Management.

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