Thinking about your long-term financial future means more than just saving—it also means planning for how your savings will be taxed. One powerful strategy that often gets overlooked? The Roth IRA conversion.
Used wisely, a Roth conversion can help reduce future tax burdens, create flexibility in retirement, and support your estate planning goals. But it’s not right for everyone—and timing is everything.
Here’s what you need to know.
What Is a Roth IRA Conversion?
A Roth IRA conversion is when you move money from a traditional IRA (or other pre-tax retirement account) into a Roth IRA. When you do this, you’ll pay income tax on the amount you convert now—but going forward, the money grows tax-free, and withdrawals in retirement are also tax-free (as long as you follow the rules).
Think of it as paying your taxes up front so you never have to worry about them again.
How Does It Work?
Let’s say you have $100,000 in a traditional IRA. If you convert that amount to a Roth IRA:
– You’ll owe income tax on the $100,000 in the year you make the conversion.
– That money then grows inside the Roth IRA with no required minimum distributions (RMDs).
– When you retire, you can withdraw the money—and any growth—completely tax-free.
You don’t have to convert your whole IRA all at once. Many people do partial conversions over several years to manage the tax hit.
When Does a Roth Conversion Make Sense?
✅ 1. You Expect to Be in a Higher Tax Bracket Later
If you think your income (or tax rates in general) will go up in the future, paying tax now may save you money in the long run.
✅ 2. The Market Is Down
When investment values are temporarily lower, you can convert more shares for the same tax cost. Then when the market rebounds, all that future growth is tax-free. (This pairs nicely with tax loss harvesting!)
✅ 3. You Want Tax-Free Income in Retirement
Unlike traditional IRAs, Roth IRAs don’t have RMDs. That gives you more control over your retirement income—and can help manage your tax bracket in later years.
✅ 4. You’re Planning Your Estate
Roth IRAs are a great tool for passing tax-free wealth to heirs. Beneficiaries will still need to take distributions, but they won’t owe income tax on the inherited account.
What Are the Downsides?
Roth conversions can be powerful, but they aren’t right for everyone. Consider these factors:
- You’ll owe taxes now. If you don’t have cash on hand to cover the tax bill, a conversion could strain your finances.
- It could push you into a higher tax bracket. Large conversions can trigger a spike in your income tax, or affect Medicare premiums and tax credits.
- It’s irreversible. The IRS no longer allows you to “undo” a Roth conversion, so careful planning is key.
Roth Conversions and Estate Planning
At The Village Law Firm, we often talk to clients about Roth conversions in the context of legacy and tax strategy. Some key ways this ties into your broader plan:
- Prepaying taxes for your heirs, reducing estate taxes and providing heirs with tax-free income
- Coordinating with trust funding or Medicaid planning for long-term care
The strategy can be especially useful when paired with low-income years, charitable giving, or depressed asset values.
Bottom Line: Timing Is Everything
A Roth IRA conversion can be a powerful move—but only when it’s part of a larger financial or estate plan. The best time to consider one is:
– When your income is temporarily lower (like early retirement years)
– When the market is down
– Before tax laws or your tax bracket change