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A Roth conversion can be a powerful retirement tax strategy, but the timing matters because every pretax dollar you convert generally adds to your taxable income for that year. Converting in a lower bracket may help reduce lifetime taxes, while converting too aggressively can push income into higher brackets and trigger other tax consequences. The goal is to identify when paying taxes now may be more favorable than paying them later.
Ultimately, the decision to convert involves making a number of assumptions and balancing the trade-offs. This is where a financial advisor can help you take a closer look at your situation now and in the future, and determine which option might be best for you.
Roth Conversion Concepts
In a Roth conversion, an investor transfers funds from an IRA or other pre-tax retirement account into a Roth IRA. This allows for tax-free withdrawals in the future, as well as some other flexibility like avoiding required minimum distributions (RMDs), but requires paying taxes upfront on the converted funds.
Tax Bracket
Your current tax bracket is a key starting point in deciding whether to perform a conversion. For example, say you’re in the top 37% marginal income tax bracket. A conversion of $1 million may require paying taxes on all the converted funds at the top rate. This means an immediate tax bill of $370,000.
It’s difficult to say an investor in one tax bracket should do a conversion while an investor in another shouldn’t. However, generally speaking, a investor who can convert without their current taxable income pushing them above the 12% bracket is likely to profit from a conversion. The same may go for a investor who will be moved from the 22% bracket to the 24% bracket. But an investor who will jump two brackets, or from the 24% bracket to the 32% bracket? They’re less likely to see a significant benefit.
Investors can potentially reduce the tax bill or at least manage its impact with the help of a gradual or staggered conversion. A typical approach is to convert only enough funds to bring the investor up to the top of the current or next-highest tax bracket.
Whether done all at once or gradually, it’s generally advisable to pay taxes on conversions with funds other than those being converted. This allows the investor to keep all of the retirement money in the tax-advantaged account, where it can grow without incurring income taxes. Depending on the investors age at the time of the conversion and the account the money is coming from, this may even be a requirement. A financial advisor can help you navigate all the rules and tradeoffs involved in a Roth conversion.
Timing
Timing is a key consideration. Converted funds can’t be withdrawn without penalty for five years, depending on your age and potentially other circumstances. Because of that restriction, people who are close to retirement and will need the converted funds for living expenses sooner than in five years often opt not to go ahead with a conversion.
Required minimum distributions (RMDs), which mandate investors start making minimum withdrawals starting at age 73 or 75, may require additional complications many retirees may seek to avoid. A Roth IRA does not have RMD requirements, allowing more flexibility for converters.
Estate planning may also play a role. Funds in a Roth can be passed on to heirs tax-free, which can increase the effective value of a bequest.
The major factor, however, is the anticipated tax bracket after retirement. In most cases, people have less income after retirement. Thus they’re in a lower tax bracket than while they are while working. This reduces the tax benefit of a conversion. It may also cost them more in taxes than if they didn’t do a conversion. If an investor expects to be in a higher tax bracket after retirement, on the other hand, a conversion is more likely to make financial sense.
Roth Conversion Strategy
The staggered conversion strategy is just one of several ways to manage or reduce the tax cost of a conversion. For instance, say an investor doing a conversion experiences uneven income flows. They may choose to convert larger amounts in years when their income is down. By reducing their taxable income, this could subject the converted money to taxes at a lower rate.
Another tax strategy is to convert when the financial markets are down. This allows an investor to convert at a lower value, reducing taxes. All while taking advantage of the enhanced future growth prospects as the market recovers.
One aspect of a conversion that’s important to keep in mind is that a conversion is one-way and cannot be undone. If you convert and pay taxes now, the money used to settle the conversion tax is forever gone from your nest egg. Given the uncertainty about important future elements such as tax rates many years from now, converting is a move to be made only after duly considering and balancing the tradeoffs.
How to Know You’re in the Right Tax Bracket
There is no single federal tax bracket in which a Roth conversion automatically makes sense. The key question is whether the marginal tax rate you pay on the conversion today is likely to be lower than the rate you would otherwise pay when withdrawing the money later. Because untaxed amounts converted from a traditional IRA are generally included in ordinary taxable income for the year of the conversion, converting too much at once can push part of the transaction into a higher bracket.
One common approach is to use a Roth conversion to fill up an existing tax bracket without spilling too far into the next one. For 2026, for example, the 22% federal bracket applies to taxable income above $50,400 for single filers and $100,800 for married couples filing jointly, while the 24% bracket begins above $105,700 and $211,400, respectively. A taxpayer who expects to face similar or higher rates later may decide that converting enough to use some or all of the available room in one of these brackets is worthwhile.
Your current bracket, however, is only part of the decision. Future required minimum distributions, Social Security income, pensions and other retirement income can increase taxable income later, potentially making a conversion during a temporarily low-income year more attractive. Conversely, converting while you are still earning a high salary could produce a larger immediate tax bill than waiting until your income declines.
For example, suppose a married couple has $170,000 of taxable income in 2026 before a Roth conversion. Because the 24% bracket does not begin until taxable income exceeds $211,400 for joint filers, they would have roughly $41,400 of room before additional income starts entering that bracket. They might consider converting some or all of that amount if doing so fits their broader retirement and tax strategy.
Other tax effects can also matter. A larger conversion can increase adjusted gross income, which may affect taxation of Social Security benefits, Medicare income-related surcharges, deductions, credits and state income taxes. For that reason, determining the “right” bracket usually means comparing the tax cost of converting today with the expected tax cost of leaving the money in the traditional IRA and withdrawing it later. The easiest option to know for sure is to work with a professional to help guide your process.
Bottom Line
Converting from an IRA to a Roth can preserve tax-free growth while allowing for tax-free withdrawals in retirement. Conversion can be costly, however, because converted funds are taxed as current income for the year when the conversion is completed. This can lead to a large tax bill. Your current tax bracket is one of several factors that can help you decide whether or not the move makes sense. In addition, investors will likely consider several other elements, including current age and age of planned retirement, anticipated tax bracket after retirement, and expected future income growth.
Retirement Planning Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estimating your future Social Security benefit is often a first step to crafting a retirement plan. SmartAsset’s Social Security Calculator tells you how much your monthly retirement benefit is likely to be, using your age, income and other factors.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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