A Roth IRA conversion is an extremely powerful tool that can be utilized to create income when you are at lower tax brackets in order to avoid creating income at future higher brackets. Essentially, they give you the ability to create income on your terms.

You must have a Traditional IRA with a balance in order to complete a Roth conversion. The mechanism is simple: you transfer money from a Traditional IRA into a Roth IRA. The value of the transfer (either cash or investments) is the amount of taxable income created at the time of the conversion.

When is a Roth conversion beneficial?

Low income years — Income over a lifetime is generally stable and upward-trending. However, everyone will experience higher and lower periods of income due to bonuses or the loss of a job. During the lower income periods, consider a Roth conversion if your income falls into a low tax bracket that you won’t be in for the rest of your life.

Retirement before Social Security — not all individuals work until the full retirement age of 67. Retirees have the option of taking the Social Security benefit as early as 62 or delaying it to receive a larger benefit as late as 70 (note: delaying is almost always the best option). It is the perfect time to do a Roth conversion if you are retired but not yet taking Social Security. Social Security generally doubles your tax bracket for a certain range of income based on the unique way that it is taxed. This means that creating income a few years before Social Security can help you avoid a doubled tax bracket while receiving Social Security benefits. There is a huge opportunity to reduce your lifetime tax burden if you appropriately plan for your taxable distributions during this time of your life.

Before death — the estate tax, with its new $22.4M exclusion, only affects families that are in the top 0.5% of wealth in the country. However, all heirs of Traditional IRAs will pay tax on distributions no matter the amount. This can cause distributions to be taxed at a higher rate to heirs if they are in higher tax brackets than the original owners. In that circumstance, it may make sense for the owner to convert the IRA to a Roth before death so that distributions can be taxed at their lower marginal rate.  

Things to consider

It is crucial to use a tax professional to clearly estimate the initial tax burden and the eventual tax benefit from a Roth conversion. The passage of the Tax Cuts and Jobs Act removed the ability to undo a Roth Conversion. This means that you are stuck with the effects, which can be particularly destructive to your wealth if you do a Roth conversion and then the market subsequently tanks. You will owe tax on the pre-crash values despite the current investment value being substantially lower.

You can do as many conversions each year as you want. It is best to do a Roth conversion as early as possible in the year from a growth perspective. You will benefit from tax-free growth longer and earlier if the money goes into the Roth at the beginning of the year. However, you may not know what your tax situation will look like until year end. In that case, do most of your annual conversion at the beginning of the year and then make a final conversion at year end with the remainder based on your accurate taxable income.  

It is always better to pay the tax from the conversion using non-Roth conversion money. Whether you have Required Minimum Distributions that you can utilize to send additional withholding to the IRS or you pay your taxes quarterly, don’t create more income to pay tax on the distribution as that lessens the benefits of the conversion.

The money from a Roth IRA conversion has its own IRS 5-year timer. This means that you are not allowed to take a distribution from the amount of the conversion until 5 years after the individual conversion date unless you want to pay an additional 10% penalty tax. Fortunately, Roth IRA distributions follow a waterfall pattern where the distributions come from the non-taxable Roth contributions first before being subject to the 10% penalty tax.


Roth IRA conversions are a great tool for managing taxes throughout your life. However, they can’t be undone and can cause a huge upfront tax bill if not appropriately planned for. Schedule a meeting with us if you would like to see how this planning opportunity could benefit you.

Written by Garrett Gould

Garrett Gould is a remote financial planner who specializes in long-term tax management. He is the co-owner of Halyard Financial and advises individuals, families, and small business owners throughout the nation. Garrett is an Enrolled Agent with the IRS who has passed all three of the CFA exams and has been creating financial plans for several years. Garrett is located on the Upper West Side in New York City.