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  • Writer's pictureMark Fonville, CFP®

What is a Roth Conversion?

What is a Roth Conversion?

Do you have an IRA, 401(k), or 403(b)? If you do, a Roth conversion could be a smart financial move for your retirement planning.

By converting some or all of your funds to a Roth IRA, you can take advantage of tax-free growth on investments. It can also lead to tax-free withdrawals in retirement without forced distributions.

Before deciding whether a Roth IRA conversion is right for you, consider factors such as your current and expected tax situations, along with your financial needs.

A financial advisor skilled at tax planning for retirement can help you evaluate the benefits and drawbacks of a Roth IRA conversion. This can help you determine the best strategy for your retirement plan.

In this article, you’ll see what the Roth conversion process looks like, along with the pros and cons, and potential benefits of a Roth conversion.

Be sure to download our Should I Consider Doing a Roth Conversion? flowchart to help find out if a conversion is the move for you.

Let's dive in!

What is a Roth Conversion?

A Roth conversion is the process of transferring funds from a retirement account, such as a traditional IRA or a 401(k) plan, into a Roth IRA. This changes the tax treatment of the funds from tax-deferred to tax-free.

Why is this important?

Because you pay taxes upfront on the converted amount. However, qualified withdrawals in retirement are then tax-free.

4 benefits of a roth conversion

Here's a bit more detail:

  • Lower Taxes Paid Upfront: When you convert your funds, you'll owe income taxes on the converted amount in the year of the conversion. This amount is added to your taxable income for that year, potentially increasing your taxes. Ideally, the conversion is done in a year when your taxable income is low.

  • Tax-Free Withdrawals in Retirement: Qualified withdrawals from a Roth IRA are tax-free. This includes both contributions and the Roth account’s investment growth. To qualify for tax-free withdrawals, the Roth IRA must have been open for at least five years and must meet certain conditions, such as withdrawals being made after age 59½.

  • Tax-Free Growth: Unlike traditional retirement accounts, where investment gains are tax-deferred and taxed upon withdrawal, gains in a Roth IRA are not subject to taxes as long as the withdrawals are qualified.

  • No Required Minimum Distributions (RMDs): Roth IRAs are not subject to RMDs during the account owner's lifetime. This means you're not required to take withdrawals from your Roth IRA at a certain age. This allows your investments to continue growing tax-free for as long as you wish.

Keep in mind that while qualified withdrawals are tax-free, non-qualified withdrawals may be subject to taxes and a 10% early withdrawal penalty.

You can convert to a Roth account directly within most big brokerages. Or you can convert directly from one brokerage to another. This direct approach can help avoid early withdrawal penalties.

Consult with one of our professional financial advisors today. You can find out if converting your retirement funds to a Roth IRA is a good idea.

Who Should Consider a Roth Conversion?

If you’re considering a Roth conversion, that’s great! But keep in mind that a Roth conversion isn’t for everybody. If you are nearing retirement and anticipate your taxable income to drop, Roth conversions can make sense. However, if you are early in your career and earning a high income, Roth conversions may not be as beneficial.

If you fall into one of the categories below, a Roth conversion might be a good move for you:

  • Expecting Higher Tax Rates in Retirement: By paying taxes on the converted amount at your current tax rate, you might end up paying less over your lifetime. With a Roth conversion, you can lock in tax-free growth and withdrawals in retirement. This avoids potentially higher taxes on withdrawals from traditional retirement accounts in the future.

  • Long-Time Horizon Before Retirement: More time can lead to more tax-free growth. By converting funds early while your income is low, you can pile up and compound your tax-free retirement savings.

  • Diversify Tax Exposure in Retirement: By converting some of your traditional retirement funds, you can create a tax-diversified portfolio. This allows you flexibility in retirement to withdraw from both traditional and Roth accounts based on your tax situation at the time. potentially minimizing your tax liability.

Ok, now that you know who’s best suited for a Roth conversion, let’s look at some examples to show when a Roth conversion may be a good move:

Exiting Business Owner: Alex, 54, Engineering Firm

  • Financial Situation: Alex recently sold his company. He is still young, at 54, and has many years ahead in retirement. His taxable income has dropped off substantially even though he has substantial liquid assets that he received from the sale of his business.

  • Advantageous Scenario: A Roth conversion may be a benefit for Alex. By converting some of his traditional 401(k) funds to a Roth IRA, he can pay taxes at his current, lower rate. As Alex continues to be in a lower tax bracket in his 50s and 60, he can keep converting his Roth IRA at the 12% tax rate. This can build up his tax-free retirement savings over time.

Pre-Retiree: Sarah, 62, Marketing Manager

  • Financial Situation: Sarah plans to retire this year. She has a traditional IRA with $1.3 million and other investments including $300,000 in cash. She considered taking social security at 62, but decided to delay until age 70 to keep her taxable income low.

  • Advantageous Scenario: Sarah may benefit from a Roth conversion. By converting a portion of her traditional IRA to a Roth IRA until she turns age 70, she can spread out the tax liability and reduce her future tax burden. She is able to convert her IRA at the 22% tax bracket. This strategy could also provide her with income and tax diversification in retirement.

Retiree: Mary, 65, Retired Teacher

  • Financial Situation: Mary is retired and receives a pension. She also has a traditional IRA and owns her home outright. She has not started social security.

  • Advantageous Scenario: Mary's situation may not be as straightforward for a Roth conversion, as her income may already be stable in retirement and she is squarely in the 24% tax bracket. However, if Mary expects to leave a tax-free inheritance to her heirs, converting a portion of her funds to a Roth IRA could be beneficial. Her heirs could receive the Roth IRA tax-free, providing them with a valuable asset.

Once again, these examples highlight how people in different life stages and financial situations can benefit from a Roth conversion. It can be a useful strategy for retirement and tax planning.

Want to find out if Roth conversions could potentially be right for you? Explore our free flowchart to learn more. 

Factors to Consider Before a Roth Conversion

If you want to do a Roth conversion, you should first look at the whole picture and understand more factors. This can help you determine how it aligns with your financial plan and retirement goals.

Here are several factors to consider:

Tax Impact of Conversions: Analyze the impact of current and future tax rates on the decision to convert. If you expect to be in a higher tax bracket in retirement, a Roth conversion may be a good move. You can pay taxes on the converted amount at your current, lower rate.

Cash Flow and Liquidity: Assess the availability of your funds to pay taxes on the converted amount. You'll need to have enough cash on hand or other funds to cover the taxes.

Be Aware of IRMAA: IRMAA stands for Income-Related Monthly Adjustment Amount. It's an additional amount that some people must pay for their Medicare Part B and Medicare Part D coverage if their income exceeds certain thresholds. If you're not careful, too much money converted to a Roth can trigger the IRMAA penalty.

Potential Advantages:

  • Tax-Free Withdrawals: Qualified withdrawals from a Roth IRA are tax-free. This can help lower your overall taxes in retirement.

  • Diversification of Income: Roth conversions allow you to diversify your income and reduce taxes in retirement.

  • No RMDs: Roth IRAs are not subject to RMDs during the account owner's lifetime. This provides flexibility in retirement income planning.

  • Potential for Tax-Free Growth: Investments in a Roth IRA grow tax-free. This can enhance your long-term portfolio growth.

  • Estate Planning Benefits: Roth IRAs can be passed on to heirs tax-free. This can provide a tax-efficient wealth transfer strategy.

  • Flexibility in Withdrawals: Contributions to a Roth IRA can be withdrawn without taxes or penalties. This can provide more flexibility than traditional retirement accounts. However, the earnings in the Roth IRA would still need to meet withdrawal rules to avoid taxes and penalties.

Potential Drawbacks:

  • Immediate Tax Liabilities: Converting funds to a Roth IRA involves paying taxes on the converted amount in the year of the conversion.

  • Reduced Funds in the Short-Term: Once funds are converted to a Roth IRA, you cannot withdraw them penalty-free for five years, so you'll need to consider your liquidity needs.

  • Potential for Higher Taxes in Retirement: While Roth withdrawals are tax-free, if your tax rate in retirement is lower than when you made the conversion, you may have paid more in taxes.

  • Impact on Government Benefits: A large Roth conversion could increase your taxable income and impact eligibility for government benefits tied to income.

Still unsure if a Roth conversion is right for you? Download our guide Should I Consider Doing a Roth Conversion?


If you’re looking to limit your taxes in retirement, a Roth conversion might be a great move. It offers tax-free growth, flexibility with withdrawals, and potential estate planning benefits.

However, it’s important to consider many factors before making a decision. This includes current and future expected tax rates, cash flow needs, and other pros and cons of a conversion.

Consulting with a financial or tax advisor can help you determine if a Roth conversion is right for your retirement goals. Remember, the decision to convert to a Roth IRA should align with your overall financial plan.

We hope that you’ve found this article valuable when it comes to learning about “What is a Roth Conversion?”

Want to find out if you should do Roth conversions in retirement? Contact us for a free retirement assessment.


Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Part of this content was aided by AI tools. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.


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