What Is a Roth Conversion?

Imagine two couples who retire with identical $2 million IRAs.

Both have saved diligently. Both earned similar investment returns. Both retire at the same age.

Yet one couple ends up paying hundreds of thousands of dollars more in lifetime taxes than the other.

How is that possible?

The difference often isn't investment performance. It's tax planning. One of the most powerful tax planning tools available is a Roth conversion.

How Traditional IRAs Work

Let's start with the basics.

Remember when you contributed money to your traditional IRA or 401(k)? You generally received a tax deduction for those contributions.

For example, suppose you earned $100,000 and contributed $5,000 to your traditional IRA. Instead of paying taxes on $100,000, you only paid taxes on $95,000. In other words, the government rewarded you for saving for retirement.

Your investments then had years—sometimes decades—to grow without being taxed each year.

Eventually, however, the bill comes due.

Every dollar you withdraw from a traditional IRA is generally taxed as ordinary income. If you've accumulated a large retirement account, those withdrawals can become significant, especially once Required Minimum Distributions (RMDs) begin.

So What Is a Roth Conversion?

A Roth conversion simply means moving money from a traditional IRA into a Roth IRA.

The catch is that you pay income tax on the amount you convert in the year of the conversion.

Why would anyone voluntarily pay taxes today?

Because once the money is inside a Roth IRA, future qualified withdrawals are tax-free. That means the money can continue growing without creating future income taxes when you withdraw it.

In many situations, paying taxes today can result in paying substantially less tax over your lifetime.

Why Roth Conversions Can Be So Valuable

A Roth conversion isn't about avoiding taxes.

It's about deciding when you pay taxes.

For many retirees, there is a window of opportunity after they stop working but before Social Security and RMDs begin. During those years, taxable income may be lower than it will ever be again.

That lower-income period can create an opportunity to move money into a Roth IRA while paying tax at relatively favorable rates.

Depending on your circumstances, a Roth conversion may help you:

Reduce future Required Minimum Distributions.

Create tax-free income later in retirement.

Leave tax-free assets to your beneficiaries.

Gain more flexibility over your taxable income each year.

Potentially reduce your lifetime tax bill.

When Does a Roth Conversion Make Sense?

Every situation is different, but a Roth conversion may be worth exploring if you:

• Recently retired.
• Expect to be in a higher tax bracket later.
• Have significant traditional IRA balances.
• Want to leave assets to children or grandchildren.
• Can pay the conversion tax using money outside your retirement accounts.
• Expect Required Minimum Distributions to push you into higher tax brackets.
• Own a business that had an unusually low profit year.

Just because someone can do a Roth conversion doesn't mean they should. The amount converted—and the timing of the conversion—can make a tremendous difference.

When a Roth Conversion May Not Be the Right Choice

There are also situations where a Roth conversion may not be beneficial. For example:

• You're already in an unusually high tax bracket.
• You'll need the IRA money in the near future.
• You don't have cash available to pay the tax.
• You reasonably expect to be in a much lower tax bracket later.

This is one reason blanket advice rarely works. A Roth conversion that is an excellent strategy for one family may be a poor decision for another.

The Most Common Mistake We See

One of the biggest mistakes we encounter is waiting too long.

Many people don't consider Roth conversions until after Required Minimum Distributions have already started.

By then, they may have lost years of opportunity.

Once RMDs begin, taxable income often increases, making Roth conversions more expensive. We've seen many retirees miss opportunities simply because no one looked ahead and modeled the years before RMDs began.

Roth Conversions Are Only One Piece of the Puzzle

This is where comprehensive retirement planning becomes important.

We never evaluate a Roth conversion by itself.

Instead, we look at questions such as:

• When should Social Security begin?
• How will future Required Minimum Distributions affect taxes?
• Will Medicare premiums increase because of higher income?
• Which accounts should retirement income come from first?
• Are charitable giving strategies available?
• What are your long-term estate planning goals?

Every one of these decisions affects the others.

Looking at only one piece often leads to missed opportunities. Looking at the entire picture often reveals strategies that can meaningfully improve retirement outcomes.

Final Thoughts

Many people assume retirement planning is primarily about choosing investments. In reality, some of the biggest opportunities come from making smarter tax decisions over the next 20 or 30 years.

A Roth conversion is one of the most powerful tools available—but only when it's used as part of a broader retirement strategy.

If you're approaching retirement and would like to understand how Roth conversions, Social Security, Required Minimum Distributions, tax planning, and retirement income all fit together, we'd be happy to have a conversation. Sometimes the best opportunities aren't found by looking at one decision—they're found by seeing the whole picture.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.