Roth Conversions Explained: When Converting Makes Sense (and When It Doesn't)

Think of your traditional IRA as a deferred tax bill with an unknown interest rate. You got a tax break when you contributed, but you’ll owe taxes on every dollar you withdraw—and you have no idea what tax rates will look like in 10, 20, or 30 years. A Roth conversion is like refinancing that uncertain future debt into a fixed-rate loan at today’s known rates. If today’s rate is lower than tomorrow’s, you win.

The Mechanics: What Actually Happens

When you convert, you move money from a traditional IRA (or roll over from a traditional 401(k)) into a Roth IRA. The converted amount is added to your taxable income for the year. You pay ordinary income tax on it—there’s no special capital gains rate or penalty, just regular income tax. After that, the money grows tax-free forever, and qualified withdrawals in retirement are completely tax-free.

There’s no income limit on who can convert. Even if you earn too much to contribute directly to a Roth IRA, you can convert unlimited amounts from a traditional account. This is what makes conversions such a powerful planning tool for high earners.

Why Convert? Three Compelling Reasons

Tax-free growth compounds powerfully. When your investments grow inside a Roth, you never share those gains with the IRS. A $100,000 conversion that doubles to $200,000 means $100,000 in gains that will never be taxed. In a traditional account, you’d owe $24,000+ on those same gains at a 24% rate.

No Required Minimum Distributions. Traditional IRAs force you to start withdrawing at age 73 (75 starting in 2033), whether you need the money or not. These RMDs can push you into higher tax brackets and increase Medicare premiums. Roth IRAs have no RMDs during your lifetime, giving you complete control over your taxable income in retirement.

Estate planning advantages. When your heirs inherit a Roth IRA, they must withdraw it within 10 years under current rules—but those withdrawals are tax-free. Inheriting a traditional IRA means your beneficiaries pay income tax on every dollar, potentially at their peak earning years’ rates.

The Golden Window: Gap Years Strategy

For many retirees, the years between stopping work and starting Social Security and RMDs create an unusual opportunity. Picture someone who retires at 62 with $1.2 million in a traditional IRA. Their only income might be $30,000 from a taxable brokerage account. Without any conversion, they’re barely using the 12% bracket. But at 70, Social Security adds $35,000. At 73, RMDs add another $50,000+. Suddenly they’re in the 22% or 24% bracket—and locked in.

The gap years are when you can fill up lower brackets strategically, converting enough to reach the top of the 12% or 22% bracket without spilling into higher rates. Done across 5-10 years, this can shift hundreds of thousands of dollars from “taxed at an unknown future rate” to “taxed at 12%”—a potentially massive arbitrage.

The math behind a Roth conversion comes down to one question: is the tax you pay today less than the tax you’d pay on the same money (plus its growth) in the future? Let’s break down exactly how to calculate this.

The Core Conversion Calculation

The key insight: you’re not just comparing tax rates, you’re comparing the tax on the principal today versus the tax on the principal plus all its growth later. This is why conversions can win even if your future rate is similar to today’s—you’re paying tax on a smaller base.

Tax Cost at Different Income Levels

The tax on a conversion depends entirely on your other income that year. A $50,000 conversion costs vastly different amounts depending on where it lands in the tax brackets:

Notice how the same $50,000 conversion costs anywhere from $5,528 to $16,000 depending on your other income. This is why timing matters so much—converting in low-income years can cut your tax cost by more than half.

A Tale of Two Retirees

Let’s follow two 62-year-olds, each with $800,000 in a traditional IRA and $30,000 in annual living expenses from other sources. They have identical situations but take different approaches.

Both end up with similar total balances, but Patricia converted $500,000 at an average rate of 12%, while David will pay 22-24% on his entire balance as he withdraws. Over David’s remaining retirement, that difference could exceed $100,000 in additional taxes—money that stays in Patricia’s family instead.

Critical Rules: Pro Rata and the 5-Year Clock

The Pro Rata Rule: If you have both pre-tax and after-tax (non-deductible) contributions in your traditional IRAs, you can’t cherry-pick which dollars to convert. The IRS treats all your traditional IRAs as one pool. If 90% of your total traditional IRA balance is pre-tax and 10% is after-tax, then 90% of any conversion is taxable. This can complicate conversions for people who’ve made non-deductible contributions. One workaround: roll the pre-tax portion into a 401(k) if your plan allows, leaving only after-tax money in the IRA.

The 5-Year Rule: Each conversion has its own 5-year clock. You can withdraw the converted principal tax-free anytime (you already paid tax on it), but if you withdraw before age 59½ and before 5 years have passed since that specific conversion, you’ll owe a 10% penalty on the amount. After 59½, this rule doesn’t apply. For most retirees considering conversions, this is a non-issue.

A Roth conversion isn’t a one-time decision—it’s a multi-year strategy with several levers you control. Getting these right can mean the difference between saving $30,000 and saving $150,000 over your lifetime.

The Four Levers You Control

Reality Check: When NOT to Convert

Roth conversions aren’t always the right move. Here are situations where converting may hurt more than help:

You’re already in a high bracket. If you’re in the 32% or 35% bracket now and expect to be in the 22% or 24% bracket in retirement, converting locks in the higher rate. Wait until your income drops.

You need the money within 5 years. The 5-year rule and potential penalties make short-term conversions risky if you’re under 59½. Even after 59½, the tax-free growth benefit needs time to overcome the upfront tax cost.

You rely on ACA subsidies. If you buy health insurance through the ACA marketplace, conversion income counts toward your Modified Adjusted Gross Income. A large conversion could reduce or eliminate your premium subsidies, adding thousands to your effective tax cost. Model this carefully.

You expect significantly lower future rates. If you genuinely believe you’ll be in a much lower bracket later (moving to a no-income-tax state, expecting minimal retirement income), traditional withdrawals may win. But remember: tax rates can change, and RMDs create income floors you can’t control.

What If You’re Still Working?

High earners often assume conversions are off the table while employed. That’s not quite right. If you have old 401(k)s or traditional IRAs from previous jobs, you can still model future conversion windows. Some find opportunities during career breaks, while on unpaid leave, or in years with unusually low bonuses.

The backdoor Roth IRA—contributing to a traditional IRA and immediately converting to Roth—is a separate strategy for high earners who exceed Roth contribution limits. This works best when you have no other traditional IRA balances (to avoid the pro rata rule). It’s annual maintenance, not a one-time conversion of accumulated funds.

What If You’re Starting Late?

If you’re already 70 with a large traditional IRA and RMDs looming, you have less runway—but conversions can still help. Even 5-7 years of strategic conversions before RMDs begin can shift a meaningful portion of your balance to tax-free status. You’re also reducing future RMDs, which has compounding benefits: lower RMDs mean more room for additional conversions each year.

At some point, the math may favor simply paying taxes as you go rather than accelerating them. This is where personal factors matter: your health, your heirs’ tax situations, your state tax rates, and your spending plans all influence the decision. There’s no universal “too late” cutoff, but the benefit window does narrow with age.

The concepts above are powerful, but your optimal conversion strategy depends on your specific numbers—your current income, your traditional IRA balance, your expected retirement income, and your time horizon. Use the calculator below to model different conversion scenarios and see how they affect your lifetime tax picture.

Quick Start Calculator

What to Look For in the Results

This calculator provides estimates for educational purposes only. It uses simplified assumptions about tax brackets, growth rates, and future income that may not reflect your actual situation. Roth conversion decisions have significant tax implications and may affect Medicare premiums, ACA subsidies, and other income-tested benefits. Consult a qualified tax advisor or financial planner before making conversion decisions. Tax laws change frequently; this calculator reflects general principles, not current law guarantees.