What is a Roth Conversion?

What is a Roth Conversion?


Are you concerned about paying taxes on your retirement accounts? Maybe you are concerned about required minimum distributions in retirement?  Consider converting your traditional retirement account into a Roth IRA. While this option may not work for everyone, it could help you save big on taxes in retirement.


Why should you think about converting?

If you think your tax bracket might be higher in retirement, converting your traditional retirement account might be the right option for you. Roth IRAs are funded using two methods: contributions with post-tax money or the conversion of a Traditional/Rollover IRA’s pre-tax money to post-tax money. Although doing the latter would require taxes be paid, you would not owe any additional tax when you access the money in your retirement. Additionally, Roth IRAs are not subject to required minimum distributions (RMDs), so your money can sit untouched until you (or your heirs) need it. If you’re looking to maximize your estate for your beneficiaries, a Roth could be the way to go.


Why would this be something I should NOT consider?

Converting to a Roth IRA isn’t for everyone. If you’re nearing retirement and are relying on your traditional retirement account to cover your day-to-day expenses, converting to a Roth could do more harm than good. It’s also a bad idea for those who aren’t financially prepared to pay the conversion tax, as you’ll owe income tax now for the pre-tax money you saved in a traditional retirement account.

A Roth IRA might not work for individuals thinking about donating most of their IRA to charity, either. This is a common strategy to fulfill your RMD without creating additional taxable income, but it serves no purpose if you’re using a Roth IRA. If generous donations are part of your retirement plan, it might be wise to stick with your traditional retirement account.


If I want to do a Roth Conversion, what happens next?

You might not want to try and convert your traditional retirement account all at once, especially if you’re dealing with a rather large sum of money. Instead, you might want to stretch out your conversions over the course of several years. This is referred to as a systematic Roth conversion plan. If you believe the time it right such as converting during lower-income years when you fall into a lower tax bracket, “you might convert just enough to keep additional distributions from being taxed at the next higher tax bracket”, says Rob Williams of Charles Schwab. Also be mindful of when it’s time to file for Medicare and Social Security, as a Roth conversion could increase not only taxes on Social Security benefits but your Medicare premiums as well.


  • If you make the choice to convert to a Roth IRA, make sure you’re fully committed. Once you’ve converted, you can’t go back to a traditional retirement account, and you’ll be stuck with a Roth.
  • You do not have to convert just cash; you can convert the positions as they stand.

Your team at Harbor is available to assist with the conversion.  We suggest that you consult with your accountant to review tax ramifications; the effect this will have on Medicare and Social Security if this applies to you, and your eligibility for the conversion.


by Matthew Hingst