Overview · 3 min read
Roth conversions
Converting pre-tax IRA or 401(k) money to Roth means paying tax on it now in exchange for tax-free growth and withdrawals later. It makes the most sense in years when your income, and so your rate, is lower than usual or lower than you expect in retirement.
- Who it fits
- People with pre-tax retirement money and a lower-income year.
- Usually not a fit
- Years when you are already in your highest bracket.
- Figures
- 2026 tax year
The key rule
The amount you convert is ordinary income in the year of the conversion. There is no income limit on conversions and no 10% early-withdrawal penalty on the converted amount itself.
How it works
Converting tends to make sense when:
- Your tax rate now is lower than you expect it to be when you withdraw the money.
- You can pay the tax from cash outside the account.
- You will not need the money for at least five years.
- You want to leave tax-free money to heirs, since Roth IRAs have no required withdrawals during your lifetime.
It tends not to make sense in a peak-earning year, or when you expect to move to a state with no income tax before retiring.
4 steps
Look for a low-income year
A sabbatical, a gap between jobs, the year after leaving a company, a startup year or early retirement before Social Security are all good windows.
Fill a bracket, not more
We calculate how much you can convert before reaching the next bracket and keep the conversion inside it.
Pay the tax from outside cash
Paying the tax from the converted money shrinks the benefit and, before 59½, may trigger a penalty.
Convert before December 31
Conversions count in the calendar year they happen and cannot be undone.
Example
A gap year
You leave your job in March and start a company. Your income this year is $60,000. Converting $100,000 of pre-tax IRA money keeps you in the 22% bracket instead of the 35% bracket you are normally in.
Common mistakes
- Each conversion has its own five-year clock for penalty-free withdrawal of the converted amount if you are under 59½.
- Higher income can raise Medicare premiums two years later for people near 65.
- A large conversion can push other income, such as capital gains, into a higher bracket or into the 3.8% net investment income tax.
Key dates
- December 31
- Conversions count for the calendar year.
Questions we hear
Can I undo a conversion?
No. Since 2018, conversions cannot be recharacterized. Convert in stages through the year if you are unsure.
Should I convert my 401(k) too?
Many plans allow in-plan Roth conversions. The same logic applies.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.