What Is a Roth Conversion?

A Roth conversion is the process of taking funds from a traditional IRA or other retirement account, and moving it over into a Roth IRA. Some people choose to do this to take advantage of the key benefits of a Roth—not having to pay taxes when they withdraw the funds in retirement—and to avoid having to take required minimum distributions (RMDs) at age 70½.

Doing a Roth conversion can make sense in some situations, but there are tax implications, upfront costs, and specific rules to follow. Learn more about how a Roth conversion works, the pros of cons of doing one, and the requirements for converting to a Roth IRA.

Definition and Example of a Roth Conversion

A Roth conversion is when you take part or all of a traditional IRA and move it into a new Roth IRA. Going forward, that means any contributions you make will not be deductible on your taxes, but you’ll get tax-free withdrawals in retirement. You can also do a Roth conversion from other types of retirement accounts including a SEP IRA or a 401(k).

• Alternate name: Backdoor Roth IRA

When you do a Roth conversion, you must pay taxes on the untaxed funds you move over since it will count as income. How much you pay will depend on the amount and your tax bracket. Ultimately, the goal for most people doing a Roth conversion is to time it for when you’re paying the lowest possible tax rate.

Here’s an example: Let’s say someone only earns $10,000 in 2022 and their tax bracket is 12%. He is assuming that his tax bracket in retirement will be higher than that, so he decides it’s a good time to convert $15,000 from his traditional IRA into a Roth. Doing so will increase his taxable income for the year to $25,000, keeping him in that 12% bracket. He’d have to pay $1,800 in taxes for the conversion. However, if that same person earned $30,000, a $15,000 Roth conversion would move him into the 22% tax bracket (because taxable earnings would go above $41,775). In that case, he’d get hit with a $3,300 tax bill.

How a Roth Conversion Works

There are three main ways to do a Roth conversion:

• Initiate a rollover: Call the firm that handles your traditional IRA and ask for a distribution check payable to you. You must then contribute that amount to a new Roth IRA within 60 days.
• Trustee-to-trustee transfer: Ask your financial institution to transfer your traditional IRA assets by sending a check directly to your Roth IRA financial institution.
• Same trustee transfer: The easiest option is to open up a Roth IRA with the same financial institution as your traditional IRA and request them transfer the amount.

Pros and Cons of Roth Conversion

Pros Explained

• It can be a workaround for making Roth contributions: If you’re above the income limits to contribute to a Roth IRA (for 2022, that means you earn more than $144,000 as a single taxpayer or $214,000 as a married, joint filer), you can use a Roth Conversion as a “Backdoor Roth IRA.” The way it works is you open a traditional IRA, which doesn’t have income limitations. Then, you open the Roth IRA and do a conversion to enjoy tax-free growth and future tax-free distributions.
• Your money can grow longer: Roth IRAs don’t have Required Minimum Distributions (RMDs) at age 72 like traditional IRAs do. Therefore, converting to a Roth means your money can stay put for as long as you want it to. Heirs who inherit your Roth IRA will have to take distributions, however.
• You might be able to save on taxes: If your primary goal is to pay less taxes, a Roth conversion can help if you’re reasonably sure you’ll be in a higher tax bracket when you retire. There is no way to guarantee this, of course, but if that plan pans out and you do the conversion while you’re in a lower bracket, you will come out ahead. Another situation where it might make sense is if you live in a state with no or low income taxes and plan to move to a state with higher income taxes.
• Your heirs can get a tax-free inheritance: If you want to leave your children and grandchildren money that they won’t have to pay any federal income tax on, a Roth IRA conversion can make that happen as long as the account has been open for at least five years before you pass.

Cons Explained

• You’ll be hit with a hefty tax bill: If you do a Roth conversion, you will be taxed on whatever amount was previously untaxed. You’ll want to be sure you have available funds to cover the cost.
• There’s no going back: Since the Tax Cuts and Jobs Act was passed, Roth conversions can no longer be recharacterized.In other words, once you do the conversion from a traditional IRA, you can’t revert back. Therefore, you want to make sure this is the right move for you before you take action.
• Your money will be tied up: Normally, a Roth IRA allows you to make qualified withdrawals whenever you want without penalty. However, when you do a Roth conversion, that money is put into a five-year hold before you can withdraw it tax-free.
• It could end up costing you: Doing a Roth conversion is always going to be a bit of a gamble since it’s tough to predict if your tax bracket will be lower in retirement than it is now. In fact, between now and then, the federal government could make changes that could impact your strategy. Those older and already receiving Social Security or Medicare benefits have to be especially careful, as the bump up in income from a Roth conversion could hurt you come tax time or increase your monthly Medicare Part B premiums.

Are Roth Conversions Worth It?

Generally, to enjoy the tax benefits of a Roth conversion, it makes the most sense if it’s done in a year when you’re in a lower tax bracket than you expect to be in once you reach retirement age. However, for some, it might be worth the upfront cost if their main goal is to leave their heirs with a tax-free inheritance.

With tax rates potentially poised to increase after the Tax Cuts and Jobs Act of 2017 expires in 2025, the next couple of years might be a good time to have a discussion about Roth conversions with your financial advisor.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!