How to know when converting your traditional IRA is tax-smart—and when it’s a trap
For some retirees (and soon-to-be retirees), a Roth IRA conversion feels like financial wizardry: turn tax-deferred dollars into tax-free gold and ride off into a sunshine-soaked, penalty-free retirement.
For others, it’s an expensive misstep that triggers a bigger tax bill than expected and causes more harm than good. So, which is it—a brilliant long-term strategy or a costly tax bomb? Like most money decisions, the answer is: it depends. The key is understanding when a Roth conversion makes sense and when it’s smarter to walk away.
Quick Refresher: What’s a Roth Conversion?
A Roth conversion means moving money from a Traditional IRA (or pre-tax 401(k)) into a Roth IRA. You pay taxes now on the converted amount, but once it’s in the Roth, it grows tax-free, and there are no Required Minimum Distributions (RMDs).
The Best Times to Do a Roth Conversion
✅ You’re in a Temporary Low Tax Bracket
This is the Roth sweet spot: maybe you’ve retired early, have no pension or Social Security income yet, or your income has dipped for another reason. Converting while in a lower bracket means you pay less tax now, while avoiding higher taxes in the future.
Example: If you’re in the 12% bracket now but expect to hit the 22% or 24% bracket later (due to RMDs or other income), converting now locks in that lower tax rate.
✅ You Have Room in Your Current Tax Bracket
Sometimes you’re not in a low bracket, but you still have room before hitting the next one. You can “fill up” your current bracket with a partial Roth conversion.
Tip: Use tax software or a pro to calculate how much you can convert before creeping into the next bracket—or before triggering IRMAA surcharges (higher Medicare premiums).
✅ You Don’t Need the Money for a While
The longer Roth funds can grow untouched, the more valuable the conversion becomes. If you won’t need the converted money for 10+ years, the tax-free compounding can easily outpace the upfront tax cost.
✅ You Want to Leave a Tax-Free Inheritance
Roth IRAs are powerful estate planning tools. Beneficiaries still have to drain the account within 10 years (thanks, SECURE Act), but they don’t pay taxes on it. A Roth can be a tax-savvy gift to heirs, especially if they’re in high tax brackets.
✅ You Can Pay the Taxes from a Taxable Account
This is key: Roth conversions are most efficient when you can pay the tax bill without tapping the IRA itself. If you have a brokerage account or cash cushion to cover the taxes, the math is more likely to work in your favor.
When Roth Conversions Can Be a Mistake
🚫 You’re Already in a High Tax Bracket
If you’re in the 32%, 35%, or 37% bracket now, converting may create an unnecessary tax hit. Unless you’re expecting even higher rates in retirement (which is rare), it’s often better to hold off.
🚫 You’re Close to Starting Social Security or RMDs
Roth conversions in your early 70s can unintentionally stack on top of Social Security, pension, and RMD income—leading to higher taxes and IRMAA surcharges. At that point, the window for low-bracket conversions has usually closed.
🚫 You’ll Need the Money in the Next 5 Years
Converted funds must sit in your Roth IRA for at least 5 years before you can touch the earnings penalty-free—even if you’re over 59½. If you need the money sooner, the conversion may backfire.
🚫 You’re Using IRA Funds to Pay the Tax
Paying taxes from the IRA itself means a smaller balance ends up in the Roth. It reduces growth potential and could even trigger early withdrawal penalties if you’re under 59½.
🚫 You’re About to Lose Financial Aid, ACA Subsidies, or Other Benefits
Roth conversions raise your taxable income for the year, period. That means you could lose Affordable Care Act health subsidies, pay more for Medicare, or knock yourself out of eligibility for certain programs.
Roth Conversion Strategy in Action
Let’s say you’re 63, retired early, and delaying Social Security until 70. You have several years of low income ahead and a large traditional IRA.
You decide to convert $30,000 per year for the next 7 years, staying within the 12% tax bracket. You pay the taxes from your brokerage account. By the time you hit RMD age, your traditional IRA is much smaller (less RMD burden), and your Roth IRA has had time to grow.
What This Does:
· You reduced your RMD burden by ~30% by shrinking your traditional IRA before RMDs begin.
· You’ll have $210K growing tax-free in the Roth IRA by 70 years old.
· You paid $25,200 in taxes up front, spread over 7 years—without bumping into higher tax brackets.
In the long run, this tax diversity can reduce your lifetime tax bill, give you more flexibility in retirement withdrawals, and potentially avoid things like Medicare surcharges (IRMAA). This is classic Roth conversion planning, and it works beautifully when the timing aligns.
Pro Move: Make Roth Conversions Before Tax Rates Go Up
The current federal tax brackets—thanks to the 2017 Tax Cuts and Jobs Act—are scheduled to sunset in 2026, reverting to higher rates. That gives a short window where tax rates are artificially low.
· 2025 Rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
· 2026 Rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Converting now could save you long-term, if rates do in fact rise.
Choose Your Moment: Timing Is Everything
Roth conversions can be one of the most powerful tools in your retirement playbook, but they’re not for everyone, and the timing is everything.
When done strategically, they reduce your future tax burden, give you flexibility in retirement, and can even boost what you leave behind. When rushed or poorly timed, they create headaches and unnecessary tax bills.
So before pulling the trigger, ask:
· Am I in a lower tax bracket now than I expect later?
· Can I pay the taxes without tapping my IRA?
· Will I let the Roth grow long enough to make it worthwhile?
And always—run the numbers. Better yet, run them with a fiduciary advisor or tax pro who understands how Roth conversions fit into your entire financial picture.
