Roth Conversions: When They Make Sense (And When They Don't)

The math behind Roth conversions isn't intuitive. Here's how to think through the decision.

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You've probably heard the advice: "Convert your traditional IRA to a Roth!" It sounds straightforward — pay taxes now, never pay them again. But the decision is more nuanced than the headlines suggest.

A Roth conversion only saves money under specific circumstances. Done wrong, you'll pay more taxes than if you'd done nothing. Let's break down when it actually makes sense.

The Basic Trade-Off

When you convert traditional IRA money to a Roth, you're making a bet: that paying taxes today, at your current rate, beats paying taxes later when you withdraw.

Traditional IRA: Tax-deferred. You got a deduction when you contributed, and you'll pay ordinary income tax when you withdraw.

Roth IRA: Tax-free growth. You pay tax upfront (either on contributions or conversions), but qualified withdrawals are completely tax-free.

The question isn't whether Roth accounts are "better" — they're just different. The question is whether converting makes sense for your situation.

When Conversions Typically Pay Off

You're in a low-income year. Maybe you retired early and haven't started Social Security yet. Maybe you're between jobs. If your taxable income is unusually low, you can convert at a lower bracket than you'd pay later.

Your future tax rate will be higher. This happens when:

• You have large traditional IRA balances that will generate substantial RMDs
• You expect significant pension or Social Security income
• You believe tax rates will increase (they're historically low right now)

You want to reduce future RMDs. Required Minimum Distributions start at 73 (75 if born after 1959). If your traditional IRA is large, RMDs can push you into higher brackets and trigger IRMAA Medicare surcharges. Converting now shrinks that future problem.

You can pay the tax bill from outside the IRA. If you have to withdraw IRA money to pay the conversion tax, you lose the benefit of tax-free compounding on that amount. Ideally, you pay the tax from a brokerage account or savings.

Example: Sarah, 62, retired with $800,000 in a traditional IRA. She won't start Social Security until 67. Her current taxable income is $40,000 (from a small pension). She's in the 12% bracket but has room up to $47,150 before hitting 22%.

She could convert $7,150 this year and pay just 12% tax on it. If she waits until RMDs force withdrawals at 73, that same money might be taxed at 22% or higher — especially stacked on top of Social Security.

Over five years of strategic conversions, she might move $150,000 to Roth at 12-22%, rather than paying 22-24% later.

When Conversions Backfire

You're already in a high bracket. If you're earning $200,000, converting more just adds to your tax bill at 32% or higher. You might be better off waiting until retirement when income drops.

Converting triggers IRMAA. Medicare premiums jump at specific income thresholds ($103,000 single, $206,000 married in 2025). A conversion that pushes you over costs an extra $1,000-5,000+ in premiums — often more than the tax savings.

You'll need the money within five years. Converted amounts have a five-year waiting period before they can be withdrawn tax-free (if you're under 59½). Convert too close to when you need it, and you'll pay penalties.

You're planning to move to a no-tax state. If you live in California (13.3% top rate) but plan to retire in Florida (0%), waiting to withdraw in Florida saves that entire state tax bill.

You rely on Qualified Charitable Distributions. QCDs let you donate directly from a traditional IRA, satisfying RMDs without the income hitting your return. Roth IRAs don't qualify for QCDs.

The Math Isn't Always Obvious

Here's what trips people up: the break-even point is longer than expected.

If you convert $50,000 and pay $11,000 in taxes (22% bracket), that $11,000 needs to be "earned back" through future tax-free growth. At 7% returns, it takes about 10-12 years for the Roth to pull ahead of leaving the money in the traditional IRA.

If you're 72, that's a tight window. If you're 55, it's plenty of time.

This is why age matters so much. Younger retirees have more years for tax-free compounding to outweigh the upfront tax cost.

How to Model This Properly

The variables interact in complicated ways:

• Your current bracket vs. future bracket
• State taxes now vs. later
• Impact on Social Security taxation
• IRMAA thresholds with 2-year lookback
• ACA subsidy cliffs (if retiring before 65)

Spreadsheets get messy fast. This is exactly what retireclarity's Roth Conversion Planner is designed for — it runs the full projection with your actual numbers and tests multiple conversion strategies to find the best approach.

The optimizer calculates your target traditional IRA balance (keeping future RMDs manageable), then tests different timing approaches: spreading conversions evenly, front-loading them, concentrating them before RMDs start, and more. You get a side-by-side comparison showing lifetime tax impact.

A Practical Framework

Before converting, work through this:

1. What's your current marginal rate? Include federal and state. If you're in the 12% federal bracket in a no-tax state, that's attractive. If you're at 24% federal plus 9% state, the bar for conversion is higher.

2. What will your rate be in retirement? Add up expected Social Security, pensions, and RMDs. Where does that land you? If it's lower than today, conversions may not help.

3. How long until you need the money? The longer the time horizon, the more conversions make sense. Under 10 years? Be cautious.

4. What's your IRMAA exposure? Run the numbers two years out. A conversion this year affects your 2027 Medicare premiums.

5. Are you on ACA insurance? If you're under 65 on marketplace coverage, conversions count as income and can reduce or eliminate your subsidies. The cliff at 400% of the federal poverty level is brutal.

The Bottom Line

Roth conversions aren't universally good or bad. They're a tool that works well in specific circumstances:

• Low current income + high expected future income
• Long time horizon for compounding
• Ability to pay taxes from non-IRA funds
• No IRMAA or ACA conflicts

If you're not sure, model it. The difference between a smart conversion strategy and a naive one can be six figures over a retirement.

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Related Articles

• The RMD Problem: Why Your IRA Might Cost More in Taxes Than It's Worth — Understand why shrinking your traditional IRA before RMDs start is so valuable.
• The ACA Cliff: Why a $1,000 Raise Can Cost You $20,000 — If you're retiring before 65, Roth conversions can destroy your healthcare subsidies.
• Why "Average Returns" Will Mislead Your Retirement Plan — Stress-test your conversion strategy against real market history.

From the Guide: How Roth Conversions Work · Tax Optimizer Deep Dive