Is a Roth Conversion Right for You? A Closer Look at a Popular Strategy

The generation currently entering retirement age is the first to have defined-contribution plans represent the lion’s share of their retirement assets. These plans- which include 401k, 403b, IRA, TSP, and similar structures- rose to prominence in the 1980s and became standard in the 1990s. The benefits of these plans are considerable: Contributions are tax deductible, grow tax deferred, and can often be matched by employer contributions.

However, as account owners enter retirement age, they are finding that these plans represent a double-edged sword: Not only are all withdrawals taxed as ordinary income, but account holders must begin withdrawing an ever-increasing amount from the account at certain age (currently 73). This increased income can often cause a spiral of further taxation, pushing investors into higher tax brackets and triggering new taxes in the form of higher Medicare premiums and other levies that kick in at higher income levels. Equally impactful is the opportunity cost of these withdrawals; Funds pulled out of a retirement account lose their tax-deferred status, and every dollar paid in taxes is a dollar that is no longer compounding.

Enter the Roth Conversion, one of the most popular planning strategies of recent years. In a conversion, you withdraw funds from a traditional account, pay the associated taxes, and deposit the money into a Roth. From there it grows tax-free, can be withdrawn with no tax implications (once you're 59½ and the funds have been in the account five years), and can pass to beneficiaries who continue to enjoy those advantages. Crucially, Roth accounts are exempt from Required Minimum Distributions.

For all the attention Roth conversions receive, they remain one of the most misunderstood moves in retirement planning. This is understandable: There are a number of complex and sometimes interrelated factors that influence the overall viability of a Roth Conversion strategy, as well as the timing, pace, and size of the conversions in cases where it does make sense.

Tax Treatment

One way to frame retirement accounts is that tax authorities will collect their due either when money goes in or when it comes out. Traditional accounts get the benefit on the way in and are taxed on the way out; Roth accounts are the reverse, funded with after-tax dollars, but withdrawn tax-free. Both grow free of tax on interest, dividends, and capital gains while the assets are inside the account.

Those saving for retirement have a choice between these account structures. With traditional accounts, investors should get in the habit of viewing balances in after-tax terms—treating the IRS and their state tax authority as "joint account owners" with a claim on a large share of the account, a claim the RMD mechanism ensures gets collected eventually.

This is one of the reasons that the math generally favors Roth-style retirement accounts. This is driven by the fact that as people age their income- and as a result- their tax burden tends to rise. Additionally, it is generally better to pay tax on some amount of money now, rather than to pay tax on those funds after they have been growing at a compound rate for years.

However, those looking to make Roth “regular” contributions face several obstacles. The first is that the Roth option was only introduced in 1998, so many investors started saving for retirement before these were rolled out. Additionally, many employers do not offer Roth options (though they have become more widely available in recent years). More importantly, Roth IRAs have two key restrictions that limit or exclude many investors: They amount of money you can contribute each year is capped, and these accounts are not available at all for higher-income households (Roth 401ks do not have these restrictions and are governed by the same limits placed on Traditional 401ks).

Fortunately, there are no such restrictions on Roth Conversions. This means that you can convert as much as you’d like without any regard to your income or to any contribution limits. The only limiting factors to making Roth conversions are your willingness and ability to pay the associated taxes, and the amount of funds available in traditional retirement accounts.

Factors to Consider

As discussed, there are a lot of variables influencing the time, pace, and ultimate value of a Roth conversion strategy. Current income and tax situation. forecasted future income, age, longevity, rate of return, length of time before, future income needs, the source of funds for paying taxes on any conversion and other factors all conspire to influence the costs and benefits of a conversion strategy. Making the situation even more complicated, even minor changes in any one of these factors can have a cascading impact on all the others.

The strongest case for a conversion is a simple one: You expect to be in a higher tax bracket later (when making withdrawals) than you are today. Paying tax now at 12% or 22% to avoid paying it later at 24% or 32% percent is a real win, especially since these invested funds will grow over time and the amounts being taxed are likely to increase.

That's why one of the best times to convert is during a low-income year. Many retirees enjoy a window in their 60s, after they stop working but before Social Security and RMDs begin. when taxable income dips. Other openings include a stretch of time off between jobs or caring for a family member, or a year with a large tax credit available to offset the conversion income.

Another factor: Given the current level of the national debt and deficit, one could argue that tax rates are likely to rise in the future, making tax rates higher than today even for the same level of income. This would create further benefits for those executing a conversion strategy but given that this argument has been cited for decades and average tax rates are lower today than they were in the past, I wouldn’t weigh this consideration too heavily.

Reducing or eliminating RMDs is often the central goal. Starting at 73, the IRS forces fully taxable annual withdrawals whether you need the money or not, inflating your income and costing you tax-deferred growth. Converting earlier shrinks the traditional balance, removing both the converted amount and its future growth, which lowers or eliminates those required withdrawals.

Estate planning is another rationale. With no lifetime distributions, a Roth can grow untouched and pass to heirs. Under current rules, most non-spouse heirs must empty an inherited IRA within ten years. With a traditional IRA, they pay income tax on everything they take out, often during their own peak earning years. A Roth inheritance lands tax-free instead (the ten-year rule still applies, but the withdrawals aren't taxed). Many investors like "pre-paying" this tax for their children or future generations.

There are many other variables to consider. Your expected rate of return matters, as this will ultimately help to determine your RMD in the future and the difference between the value of assets you pay taxes on today versus the amount of tax-free assets you can tap in later years. Age and longevity also matter. 

Downsides to Look Out For

Many of the same factors that make the withdrawals from traditional retirement accounts so onerous also apply to the increased taxable income resulting from Roth conversions. The most common surprise is Medicare. If you're 63 or older, a conversion can raise your income enough to trigger Income Related Medicare Annual Adjustments (IRMAA), an increase in Medicare Part B and Part D premiums. IRMAA works on a cliff, not a slope: Cross a threshold by a single dollar and the full surcharge applies for the whole tier. For 2026, the first surcharge tier begins at $109,000 of modified income for a single filer and $218,000 for a married couple.

Medicare looks back two years, so a conversion this year affects your premiums two years from now. A conversion that saves you money on paper can quietly hand a chunk of it back through higher Medicare bills.

Similar cliffs lurk elsewhere. A conversion can raise the portion of your Social Security benefits subject to tax, push more of your capital gains into a higher bracket, trigger additional taxes like Net Investment Income Tax or, for those buying coverage through the health insurance marketplace, reduce premium subsidies. None of these are reasons to avoid converting. They are reasons to size the conversion carefully, often converting just enough to "fill up" a tax bracket without spilling over a threshold.

Where you source the tax payment matters, too. If you use part of the converted balance to cover the bill, you shrink the very account you're trying to grow—and if you're under 59½, that withheld portion may count as an early distribution. The math works best when the tax comes from taxable savings.

Conclusion

Generally, the numbers often point toward converting a modest amount over several years rather than a large sum all at once. A partial conversion strategy, revisited annually as your income changes, tends to capture most of the benefit while sidestepping the cliffs, but this is a case where every situation is truly unique and some investors may be better served by converting more aggressively in order to take advantage of a year of lower income or do so before things like the Medicare “lookback” begins.

Ultimately, it’s about weighing the costs versus the benefits and crafting a plan that fits your family’s unique situation. Fortunately, a qualified Wealth Management professional can leverage their knowledge, experience, and powerful planning software to model the costs, benefits, and risks of any strategy.

Robinson Crothers is Managing Partner at Great South Bay Advisors in Holbrook. This column is for general educational purposes and is not individualized investment, tax, or legal advice. Securities and investment advisory services offered through Osaic Wealth, Inc., Member FINRA/SIPC. Great South Bay Advisors and Osaic Wealth, Inc. are not affiliated.