Is Now the Time to Convert Your Retirement Account to a Roth?

Tax News You Can Use | For Professional Advisors

Contributions to a Roth retirement account (which include Roth IRAs and Roth accounts in 401(k) and other retirement plans¹) are not tax deductible. However, all assets that accumulate in a Roth retirement account (including the original contributions, income and appreciation) can be withdrawn tax-free once the Roth IRA owner reaches age 59½, as long as it is more than five years after the date of the first Roth contribution. Moreover, there are no required distributions from a Roth retirement account during the account owner’s lifetime or during the lifetime of a surviving spouse named as the beneficiary. In contrast, contributions to a traditional retirement account are tax deductible, though deductions of traditional IRA contributions may be limited by modified adjusted gross income (MAGI) thresholds. And, while no income tax is due on the income and appreciation generated in a traditional retirement account as they are earned, all assets distributed from the account (the contributions in excess of the tax basis² plus the accumulated appreciation and income) are subject to income tax when withdrawn.

The benefits of contributing directly to a Roth IRA are only available to taxpayers who meet income limitations. In 2025, the amount that a married taxpayer filing a joint return can contribute to a Roth IRA is phased out between a MAGI of $236,000 and $246,000, while for a single taxpayer it is phased out between $150,000 and $165,000.³ In 2025, the annual cap on contributions to all IRAs, including Roth IRAs, is $7,000 for taxpayers under age 50 and $8,000 for taxpayers over age 50.

This means that many taxpayers who could afford to make Roth contributions are ineligible due to their higher income. However, neither the dollar contribution limit nor the income limit applies when you convert a traditional retirement account to a Roth. The Roth conversion option is open to all taxpayers regardless of income, and the only cap is the amount in the taxpayer’s traditional retirement account.

What is a Roth IRA conversion?

A conversion involves moving the assets from a traditional retirement account to a Roth IRA (or in some cases to another type of retirement plan that permits Roth accounts), which generates income tax on the full amount converted. Ideally, the taxpayer should have sufficient non-IRA assets available to pay the current tax on converted assets so that none of the traditional retirement account assets are used to pay the tax and the full amount of the traditional retirement account is converted to the Roth account.. Once the assets are in the Roth IRA, there is a five-year waiting period for the earnings of the account to be distributable tax-free. If assets are withdrawn from the Roth IRA within five years of the conversion, the portion of the withdrawal attributable to earnings in the account will be taxed. For taxpayers who have basis in their IRAs (for example, those who have made non-deductible contributions to their traditional retirement account in the past), the basis will reduce the amount of income recognized in a conversion.

What are the tax benefits of a Roth conversion?

By converting a traditional retirement account to a Roth, the taxpayer is subject to the more favorable tax treatment applicable to Roth IRAs:

• Under current law, no matter how much the assets grow in value, there will be no income tax on withdrawals from the Roth IRA, other than on earnings withdrawn within the first five years after conversion (which are taxed and are also subject to a penalty).
• The Roth IRA is not subject to the required minimum distributions (RMDs) applicable to traditional IRAs. A taxpayer who is not depending on the IRA to fully fund their retirement needs has the flexibility to control the timing of withdrawals, which allows tax-free growth while the assets remain inside the Roth IRA.
• A married couple may retain the assets in a Roth IRA until the death of the survivor without required mandatory distributions. In contrast, non-spouse beneficiaries of Roth IRAs are obligated to withdraw RMDs just like beneficiaries of traditional IRAs. For married couples who do not need distributions for living expenses in retirement, keeping assets in the account allows the tax-free growth to continue until the second death, enhancing the wealth transfer opportunity.
• A conversion may allow a taxpayer to diversify and manage exposure to income tax rates by maintaining a mix of taxable (such as a brokerage account), tax-deferred (such as a traditional IRA) and tax-exempt accounts (such as a Roth IRA) with varying rules for taxation and withdrawals, which can help mitigate the impact of the potential for higher future tax rates.
• For taxpayers concerned about outliving the life expectancy used to compute the RMDs for a traditional IRA, or those who expect to have larger expenses later in retirement, having a Roth IRA allows them to defer withdrawal of those assets until they are needed.

How to measure the benefits of a Roth conversion?

The time horizon until the retirement assets will be withdrawn and spent is a key factor to consider before implementing a conversion. The benefit of the conversion is the ability of the assets in the Roth IRA to grow tax-free, so the maximum benefit requires time for that growth to occur. In the analysis below, it would take nearly 20 years for a 55-year-old to earn sufficient growth in the Roth IRA assets to make up for the tax payment upon the conversion. Nevertheless, all else being equal, an older individual will realize the benefits of a conversion quicker. The Roth IRA owner (and the owner’s spouse, if the spouse is the beneficiary of the Roth) are not subject to RMD rules applicable to traditional IRAs. This allows the tax-free deferral to potentially continue for up to 10 years after the death of both spouses, given the 10-year payout period applicable to non-spouse beneficiaries of Roth IRAs.

The below analysis compares the after-tax proceeds with and without a Roth conversion over a period of 40 years, assuming a constant tax rate of 37%.

Why is now an advantageous time to do a Roth conversion?

The tax cost of a Roth conversion is based on two things: 1) the income tax rate and 2) the value of the retirement account. Current income tax rates for individuals are relatively low compared to the rates since World War II, and we expect that tax rates eventually will have to increase to address the growing federal debt. Considering recent market volatility, your account may have a lower value currently, and would thus generate a lower tax if you convert this year.

There are other factors that can influence whether and when a Roth conversion makes sense:

• A Roth conversion may make sense when your current marginal tax rate is lower than that expected in future years, either because you expect your income to be higher in retirement or because you expect tax rates will rise.
• A Roth conversion makes sense in a year when you have a particularly favorable tax situation, such as lower income, net operating losses, or larger than typical charitable deductions that can offset the income from the conversion.
• If the surviving spouse is the beneficiary and will need to take withdrawals for their support in retirement, they may be subject at the time of withdrawal to a higher marginal tax rate due to their single filing status. In that situation, it may make sense to do a series of Roth conversions over years when the more favorable married filing jointly tax rates apply.
• The dollars used to pay the income tax on the conversion may reduce overall estate taxes due at death, assuming the taxpayer has a taxable estate and is not passing their estate to a surviving spouse or charity.
• For many taxpayers, there is a period with lower income between the date of retirement and before their required beginning date that can be an ideal time for a Roth conversion.

Is a Roth conversion right for me?

There are certain situations where a Roth conversion may not provide a tax benefit. These include the following:

• If you are able to and plan to use qualified charitable distributions (QCD) to direct all or most of your lifetime RMDs to charity and you plan to leave your IRA to charity at your death, then the assets in your traditional IRA will not be subject to income tax. In that case, converting the account to a Roth IRA would generate an unnecessary tax. For 2025, the maximum QCD limit is $108,000 per taxpayer over age 70 ½.
• If you anticipate being in a lower tax bracket in retirement because you plan to retire to a state with a lower (or no) income tax on retirement plan distributions; or because your retirement income will be less than your income now; or because you anticipate lower income tax rates in the future, you may not benefit from a conversion.
• If higher income from conversion would disqualify you for other tax benefits you planned to use this year, such as the clean vehicle tax credit, or would increase other costs, such as raising your Medicare premiums, you may want to delay or skip a conversion.
• If you are going to withdraw assets from your IRA within five years, you will pay tax on the portion of your withdrawal that is attributable to earnings in the Roth IRA and a ten percent penalty.
• If you plan on leaving your retirement account to multiple beneficiaries and the marginal tax rate for those beneficiaries is expected to be lower than your marginal rate. Example: Grandma names her grandchildren equally as the designated beneficiaries, and each one is expected to have a top marginal rate of 22%, including their income and the RMDs, instead of Grandma’s top marginal rate of 37%.
• If you feel that the markets are near an all-time high, there is an argument that a conversion will be too expensive. Taxpayers can no longer recharacterize (or undo) a Roth conversion.
• If you do not have outside funds available to pay the income tax due on the Roth conversion, this may not be a good time to do one. Withholding the income tax due from the IRA is not ideal because fewer assets will be growing tax-free in the Roth account. This is even more of an issue if the taxpayer is under age 59 ½, since the tax dollars withheld will be treated as a distribution subject to a 10% penalty on top of the tax.
• A taxpayer who expects to have large medical expenses in the future that they plan to pay for with IRA assets may be better off not converting if medical expense deductions will offset income tax due from retirement account distributions.

If you are wavering on whether a conversion is right for your financial plan, consider whether you would benefit from a partial conversion, particularly in a year when your income is unusually low and puts you in a lower income tax bracket. Holding retirement assets in both traditional and Roth IRA accounts allows you to hedge uncertainty in future tax rates.