A Roth conversion is the process of moving assets from a pre-tax retirement account, such as a Traditional IRA, 401(k), SEP, or SIMPLE IRA, into a Roth IRA. While the converted funds are treated as taxable income in the year of conversion, the long-term advantage lies in the Roth IRA’s ability to grow tax-free and allow for tax-free withdrawals in the future.
For high earners who are often ineligible to contribute directly to a Roth IRA, a strategy known as the “Backdoor Roth” (wherein one contributes to a traditional IRA and then converts it to a Roth IRA) can be an option. In 2025, eligibility for direct Roth contributions begins to phase out at $150,000 of modified adjusted gross income for single filers and $236,000 for married couples filing jointly, making conversions particularly relevant for this group.
When Might a Roth Conversion Be a Good Fit?
1. Your tax bracket is lower today than it will be tomorrow.
If you expect your income tax bracket to rise in the future, converting now could reduce lifetime taxes. This is especially compelling for early retirees in the years between leaving the workforce and starting required minimum distributions.
2. You do not need immediate access to the money.
Roth IRAs are subject to the “five-year rule,” which requires waiting at least five years from the year of your first Roth contribution or conversion before withdrawing earnings tax-free. Not meeting the five-year rule can result in earnings being taxed as regular income. Planning ahead helps ensure flexibility without creating an unexpected tax burden.
3. You seek greater tax diversification.
Holding both pre-tax and Roth assets can provide flexibility when determining withdrawal strategies in retirement. This balance can also help reduce required minimum distributions (RMDs) from tax-deferred accounts later in life.
4. You want to leave a tax-free inheritance.
Because Roth IRA distributions are tax-free (whereas traditional IRA distributions are taxable), a conversion may help create a lasting legacy. Generally, inherited tax-deferred accounts must be distributed within 10 years. This mandatory distribution could create unwanted tax consequences for the next generation.
For additional perspective on retirement income planning, see our Retirement articles.
What to Consider Before Converting
While Roth conversions can be an attractive strategy, there are important factors to weigh:
- Immediate impact on net worth. The taxes owed on the converted amount are owed in the year of the conversion, which will reduce available assets in the short term. Your net worth will decrease, and you won’t recover this until sometime in the future.
- How you will pay the tax bill. Using taxable assets to cover the tax burden can help you preserve retirement savings and recover the converted amount more quickly.
- Time horizon. The longer funds remain invested in a Roth account the more potential tax-free growth you capture, especially during the RMD (required minimum distribution) years.
- Required minimum distributions. If you are already subject to RMDs, you must first satisfy those before converting additional amounts. It is important to consider that both the RMD and Roth conversion will be considered taxable income.
Because the right amount to convert depends heavily on your income, tax bracket, and long-term financial plan, we strongly recommend consulting with a tax professional before making a decision
At Carlson, our advisors can help you evaluate how a Roth conversion may fit into your broader retirement strategy and long-term goals. If you’d like to explore how this strategy could apply to your situation, we invite you to connect with our team.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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