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What is a Roth IRA Conversion, and is it right for you?

What is a Roth IRA Conversion, and is it right for you?

July 22, 2022

One of the most common questions we hear from our clients is about Roth IRA Conversions.

What is a Roth Conversion? And how can it be used when account values are down?

 A Roth Conversion is the transference of money from a Traditional IRA into a Roth IRA. As with everything in life, there are pros and cons to Roth Conversions. On one hand, your contributions to a Roth IRA are not tax-deductible, on the other hand, your money can be invested to grow tax-free.

Because contributions made to a Traditional IRA are tax-deductible, you will have to pay taxes on the amount of money you transfer to a Roth. On the positive side, however, if you are older than 591/2 and have held the Roth for at least five years, the converted money in the Roth account will grow tax-free and can be withdrawn without incurring any taxes or penalties.

Roth IRA as a tool when the market is down

As the market declines, some investors are taking advantage of this time to convert funds from a traditional IRA or 401(k) plan into a Roth account. Although you will pay income tax on the amount converted, you pay less in taxes converting a portfolio that has declined. We are also in a relatively low tax environment now so it may be a good opportunity to convert now at the current tax rate and create tax-free distributions for yourself in retirement. 

What about IRAs from a deceased person?

If you are the beneficiary of an IRA, there are a few options you have. Only in the case where you are the spouse of the person who left you the IRA can you convert it to a Roth IRA. You could elect to treat the IRA as your own or you can roll over the inherited assets to another traditional IRA in your name or convert the assets to a Roth IRA. Another option would be to open an Inherited IRA account. An inherited IRA, also known as a beneficiary IRA, is an account that holds assets from a deceased person's retirement savings. This can be funded from any type of IRA or 401(k) plan the deceased person had. Talk with us about your options because there are a lot of rules based on your relationship to that person and it is very important the account be set up and named properly to avoid unexpected tax consequences.

While Roth Conversions have incredible benefits, it may not be the right money move for everyone. There are certain situations when a conversion makes sense and when it doesn’t…

A Roth Conversion might be a good move for you if…

  • You want to avoid or lower future RMDs (Required Minimum Distributions) since RMD rules do not apply to Roth IRAs
  • You find yourself in a low tax bracket in a particular year
  • You are in a lower tax bracket now than you think you will be in retirement
  • Investments in your Traditional IRA have lost value


A Roth Conversion might not be a good move for you if…

  • You don’t have enough money to cover the extra tax caused by the conversion
  • You are in a higher tax bracket now than you think you will be in retirement
  • Your IRA assets are going solely to charity when you die
  • Your beneficiary’s tax bracket is lower than yours
  • You think you will need the money within five years


Most tax professionals we have spoken with about this feel the real sweet spot for a Roth Conversion is for single filers who make less than $41,775 or married filing jointly filers who make less than $83,550. In both cases, if your income is below those levels, the tax bracket is 12% but jumps to 22% when incomes cross the barrier. Keep in mind that the amount you convert will be treated as income.

Many of our clients consider conversions for estate planning purposes. Children or grandchildren who inherit Roths do have to take RMDs from the inherited Roth IRAs, but do not have to pay income taxes on the distributions, unlike traditional inherited IRAs.

Finally, if you are still working and your company provides a 401k, be sure to check your plan to see if a Roth component is offered within the 401k. Contributing to a Roth within a 401k doesn’t have the income limitations that opening an individual Roth has. A 401k with a Roth option has no income limits, so if you can get an early start on a Roth within the 401k, you might not need to convert in the future. However, if you are a single filer making more than $144,000 or married filing jointly making more than $214,000, you can’t contribute to a Roth.

Roth Conversions are complex and should be done by qualified financial professionals in order to ensure the best outcome for your situation. One way to do a Roth Conversion is to convert the funds in-kind, meaning that the funds are converted ‘as is’ to a Roth. The second way to do a conversion is to liquidate all the funds in the Traditional IRA tax-free and start over from scratch in a Roth. The third option is to liquidate some of the assets and transfer some in-kind, transferring the funds in part to the new Roth.

So, why are Roth Conversions that talk of the town lately? The Build Back Better bill was passed leaving many people concerned that the newly passed legislation may limit people’s ability to make Roth conversions in the future.

However, most people need not be overly concerned about the new bill as it focuses on limiting tax-avoidance strategies favored by very high-income earners. For most people, who are in the middle-income earner category, the Build Back Better bill will have little effect, meaning that these types of accounts are useful savings tools to consider.


If you have an interest in finding out whether a Roth Conversion is a good move for you, please CONTACT US.


Converting from a traditional IRA to a Roth IRA is a taxable event.