The Roth Conversion Sweet Spot:
When & Why It Matters
With rising economic uncertainty and market volatility, many investors are looking for ways to safeguard their long-term wealth. As retirement plans feel the pressure, it’s more important than ever to consider smart strategies for future financial security. With tax season upon us, timing is crucial in optimizing retirement savings.
One strategy that’s gaining attention is the Roth IRA conversion. While high earners often can’t contribute directly to a Roth IRA, converting pre-tax retirement funds into a Roth IRA can provide powerful, tax-free growth throughout retirement. But what is the key to making the most of this opportunity? Timing your conversion right. In this post, we’ll break down a Roth conversion and how to identify the ideal time to take advantage of this strategy for maximum benefit.
What is a Roth IRA Conversion?
A Roth IRA conversion lets you move money from a pre-tax retirement account, like a traditional IRA, 401(k), or 403(b), into a Roth IRA. You’ll pay taxes on the converted amount now, but the growth and withdrawals are tax-free from then on.
This move is popular among those with large pre-tax balances who want to reduce future tax burdens or leave behind tax-free assets for heirs.
What Should I Know About Roth IRA Conversions?
Before moving forward with a conversion, here are a few key factors to understand:
- Tax Implications
When you convert pre-tax funds to a Roth IRA, the converted amount is taxed as ordinary income in the year of the conversion. You’ll owe taxes upfront based on your income bracket, so planning is essential. The conversion must be reported on your tax return, and taxes are due when you file.
State tax treatment can vary. For example, Illinois doesn’t tax IRA distributions or Roth conversions, while Missouri and the federal government do. Always consult a tax professional to understand the full impact of tax on your state. - Income Limits
While anyone can convert to a Roth IRA, regardless of income, contributing directly is a different story. The IRS sets income limits for direct Roth IRA contributions.
| Income Limits in 2025 | ||
|---|---|---|
| Single or married filing separately | $150,000–$164,999 | Reduced contribution allowed |
| $165,000+ | Not eligible to contribute | |
| Married filing jointly or qualifying widow(er) | $236,000–$245,999 | Reduced contribution allowed |
| $246,000+ | Not eligible to contribute | |
A Roth contribution is money you deposit directly into a Roth IRA with earned income, while a Roth conversion is when you move money from a pre-tax retirement account (like a traditional IRA) into a Roth IRA and pay taxes on it now.
- Required Minimum Distribution (RMD)
If you’re age 73 or older and hold traditional IRAs, you must take your full annual RMD before making any Roth conversions. Under the SECURE Act 2.0 (effective January 2025), if you have multiple IRAs, you must calculate the RMD for each one, total them, and withdraw that full amount first.
Example:
Assume you have three IRAs with the following RMDs:- IRA 1: $5,000
- IRA 2: $10,000
- IRA 3: $20,000
When Is The “Sweet Spot” For Roth Conversions?
The ideal time to execute a Roth conversion is often in your mid-to-late 60s, after you’ve stopped working but before you begin receiving Social Security benefits or pension payments, if applicable. A key strategy is to minimize other income sources in the year you plan to do the conversion, helping to keep your tax liability as low as possible.
While you can initiate a Roth conversion anytime, careful timing can significantly enhance its effectiveness. Here are some key factors to consider when determining the best time for your Roth conversion:
- Are We in a Bull or Bear Stock Market?
The value of your investments plays a crucial role in Roth conversion timing. When the stock market is in a downturn, the lower market value means you’ll pay less taxes on the conversion. Should the market rebound, any growth will accumulate tax-free in your Roth IRA. It’s essentially turning the market volatility to your advantage. - What is your Social Security Strategy?
If you’ve built a solid financial portfolio and have a healthy life expectancy, waiting until age 70 to collect Social Security benefits can maximize your annual retirement benefit for the remainder of your lifetime. Delaying benefits also allows you to withdraw from your IRA while staying in a lower tax bracket.
Social Security faces solvency challenges, but we believe future policymakers are more likely to raise income tax rates to fund the system rather than cut retiree benefits. Although no one can predict the future with certainty, considering the possibility of higher taxes makes converting funds to a Roth IRA a smart move for many retirees seeking to reduce their long-term tax burden and lock in a known tax rate now versus an unknown rate in the future.
Will you make the most out of your Social Security Benefits? Try Our Social Security Break-even Calculator.
- Are You a Business Owner?
For business owners, a year when you experience a Net Operating Loss (NOL) can present a unique opportunity for a Roth conversion. The income tax increase typically triggered by the conversion could be offset by the NOL, making it an especially tax-efficient time for conversion.
If you’re a business owner, leveraging a down year in your business to convert funds to a Roth IRA can offer significant tax savings.
Roth IRA Timeline: Don’t Overlook the Five-Year Rule
You’ve considered market timing, tax bracket, and Social Security strategy. But there’s one more rule that could impact your Roth IRA withdrawal timeline, and it often catches investors off guard: the five-year rule.
What is the Five-Year Rule For Contributions & Conversions?
Depending on whether you are making a Roth IRA contribution or a Roth IRA conversion, there are different five-year clocks to consider:
Roth IRA Contributions | The Five-Year Rule
Withdrawals of your original contributions are always tax and penalty-free.A Roth IRA Contribution is the money you deposit into a Roth IRA.
The Rule: You must wait five years from January 1 of the year you make your first contribution to any Roth IRA before withdrawing earnings tax and penalty-free. This applies regardless of your age.
On the Plus Side: Once you have satisfied this rule for your first Roth IRA, it applies to all Roth IRAs opened afterward.
Roth IRA Conversions | The Five-Year Rule
Multiple conversions, multiple five-year clocks.A Roth IRA conversion involves moving funds from a pre-tax account, like a traditional Roth or 401(k), to a Roth IRA.
For every Roth conversion you make, a separate five-year clock starts. If you withdraw the converted funds before five years have passed, you could face a 10% early withdrawal penalty, even if you’re older than 59½.
Once each five-year period is up, those funds can be withdrawn tax-free.
To learn more about Roth Conversion Planning, visit our Retirement Decision Dashboard.
Why Pre-Retirees Should Understand Roth Conversions
Roth IRAs offer outstanding flexibility and tax advantages for those approaching retirement. Understanding how and when to leverage a Roth conversion can pay off for years to come.
- Greater Control Over Your Money Unlike traditional retirement accounts, which come with taxable required minimum distributions (RMDs), Roth IRAs allow for tax-free withdrawals. Thus, you have more control over when and how you access your money in retirement.
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Tax-Efficient Legacy
A Roth IRA can be passed on to beneficiaries income tax-free, making it a valuable tool for estate planning and leaving behind a tax-efficient legacy.
Be Prepared: Download our Estate Planning Checklist.
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Strategic Tax Management in Retirement
Roth income doesn’t count toward your taxable income, making it an effective way to manage your tax bracket, especially if you anticipate higher taxes later in retirement.
With their long-term benefits, Roth IRAs deserve serious consideration as part of your overall retirement income strategy. If you’d like to explore a potential Roth conversion or talk through your retirement plan, we’re always here to help.
How to Tell if a Roth Conversion Makes Sense for You
There’s no one-size-fits-all answer—Roth conversions require a thoughtful, personalized approach. A qualified financial advisor with retirement planning expertise can help you determine if this strategy aligns with your long-term goals.
At Toberman Becker Wealth, we take a data-driven, individualized approach. We build comprehensive retirement projections using advanced modeling tools, often extending well into a client’s 90s. These models account for national economic trends, asset allocation, tax considerations, and your unique lifestyle needs, helping to guide each decision confidently.
Take the next step toward smarter investing. Schedule a complimentary call with Toberman Becker Wealth today.
Roth Conversion FAQ
A Roth IRA conversion lets you move money from a pre-tax retirement account, like a traditional IRA, 401(k), or 403(b), into a Roth IRA. You’ll pay taxes on the converted amount now, but the growth and withdrawals are tax-free from then on.
A Roth IRA conversion lets you move money from a pre-tax retirement account, like a traditional IRA, 401(k), or 403(b), into a Roth IRA. You’ll pay taxes on the converted amount now, but the growth and withdrawals are tax-free from then on.
Roth conversions aren’t a one-size-fits-all solution—they require a personalized, strategic approach. A skilled financial advisor specializing in retirement planning can help you assess whether this strategy is coordinated with your long-term financial goals.
No, a Roth conversion does not count as an RMD. Before converting, you must take your RMD from your traditional IRA(s).
A Roth conversion ladder is a strategy for gradually converting portions of a traditional IRA or 401(k) into a Roth IRA over several years. By staggering the conversions, you can access retirement funds tax and penalty-free before age 59½ while managing your tax burden.
In most cases, you cannot convert an inherited IRA to a Roth IRA unless you are the surviving spouse of the original account holder. As a spouse, however, you can roll the inherited IRA into your own IRA and then convert it to a Roth IRA
A Roth in-plan conversion allows you to roll funds from a pre-tax workplace retirement account (e.g., 401(k) or 403(b) to a Roth account within the same plan. Not all plans offer this feature, but it’s always worth checking with your employer.
Disclosure: Any mention of a particular security and related performance data is not a recommendation to buy or sell. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Nothing on this website should be considered as personalized financial advice or a solicitation to buy or sell any securities.
Craig Toberman is a Partner at Toberman Becker Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.