The Complete Guide to Roth Conversions: Benefits, Pitfalls, and Strategies

Bryce Edmister

Roth IRAs are often called the “holy grail” of retirement accounts - and for good reason. They provide tax-free growth, tax-free withdrawals, and no required minimum distributions (RMDs) during your lifetime. For many investors, especially those with significant wealth, a Roth IRA can be one of the most valuable tools for building and preserving retirement assets.

 

But here’s the challenge: many investors hold most of their retirement savings in pre-tax accounts like a Traditional IRA or a 401(k). That means withdrawals will be taxed as ordinary income in retirement. So how do you move money into a Roth?

 

The answer is through a Roth conversion - a strategy that has surged in popularity but is also surrounded by confusion and misinformation. In this guide, we’ll explain everything you need to know about Roth conversions, including:

  • How Roth conversions work.

  • The key benefits and potential risks.

  • Common myths and misconceptions.

  • Rules like the pro-rata rule and the five-year rule.

  • Strategies for timing and tax efficiency.

  • Real-world examples with calculations.

Whether you’re a high-net-worth investor or simply someone planning for retirement, this article will help you evaluate whether Roth conversions belong in your wealth strategy.

 

What Is a Roth Conversion?

 

A Roth conversion is the process of moving funds from a pre-tax retirement account, such as a Traditional IRA, SEP IRA, SIMPLE IRA, or eligible 401(k) - into a Roth IRA.

 

When you do this:

  • The converted amount is added to your taxable income for that year.

  • You pay ordinary income tax on the converted funds.

  • Once inside the Roth, the money grows tax-free, and qualified withdrawals are also tax-free.

In short: you pay taxes today in exchange for long-term tax-free benefits.

 

Example:

  • You convert $50,000 from your Traditional IRA to a Roth IRA.

  • If your marginal tax rate is 22%, you owe $11,000 in taxes on the conversion.

  • That $50,000 now grows inside the Roth IRA, tax-free for life.

Benefits of Roth Conversions

 

Tax-Free Growth and Withdrawals

All earnings inside a Roth IRA are 100% tax-free if withdrawn after age 59½ and after the five-year rule is satisfied. For high-net-worth investors, this can translate into hundreds of thousands in long-term tax savings.

 

No Required Minimum Distributions (RMDs)

Traditional IRAs and 401(k)s force you to take taxable RMDs starting at age 73 (RMDs will shift to age 75 for those born 1960 or later). Roth IRAs, however, do not have RMDs during your lifetime. That means your money can keep compounding tax-free, and you control when (or if) withdrawals occur.

 

Estate Planning Advantages

When heirs inherit a Roth IRA, they must withdraw funds within 10 years (under the SECURE Act). But unlike inherited Traditional IRAs, those withdrawals are tax-free. In addition to the withdrawals being tax free, the heirs can allow the funds to continue growing for 10 years, before being forced to remove the funds (tax free, of course!). This makes Roths particularly powerful for wealth transfer.

 

Tax Diversification

Having both pre-tax and Roth accounts gives you flexibility to manage taxable income in retirement. For example, you could withdraw from pre-tax accounts in low-income years, and Roth accounts in high-income years, keeping yourself in lower tax brackets. It's always a good idea to have some taxable income as Congress / the IRS provides a standard deduction to offset taxable income! 

 

Hedging Against Higher Future Taxes

Tax rates are historically low right now - but may rise in the future due to government spending, policy shifts, or personal income growth. A Roth conversion lets you lock in today’s tax rates and protect your assets from future hikes.

Common Myths About Roth Conversions

 

There’s a lot of noise online about Roth conversions. Let’s bust the biggest myths:

  • Myth 1: Roth conversions are “tax-free.”
    Reality: The conversion itself is taxable. The benefit is that all future growth and withdrawals are tax-free.

  • Myth 2: Roth conversions have income limits.
    Reality: Roth IRA contributions have income limits (and can be circumvented through backdoor Roth IRA contributions), but conversions do not. Anyone can do a conversion, regardless of income.

  • Myth 3: You can undo a Roth conversion.
    Reality: Prior to 2018, you could “recharacterize” (undo) a conversion. That’s no longer possible. Once you convert, it’s permanent.

  • Myth 4: Conversions don’t affect Social Security or Medicare.
    Reality: Conversions increase your adjusted gross income (AGI), which can trigger higher Medicare premiums (IRMAA) and make more of your Social Security benefits taxable.

  • Myth 5: Roth conversions are always a good idea.
    Reality: They’re powerful, but not universal. Without careful planning, you could pay more in taxes than necessary.

Key Rules and Intricacies

 

Taxation Rules

Conversions are taxed as ordinary income in the year they occur. This means converting too much in a single year could push you into a higher tax bracket.

 

The Pro-Rata Rule

If you have both pre-tax and after-tax money in your IRAs, the IRS requires that conversions come proportionately from both. You cannot isolate only after-tax contributions unless using a specific strategy (like a backdoor Roth). The pro-rata rule applies to ALL IRAs! Uncle Sam does not care if you have two different IRAs and attempt to convert from one, the pro-rata rule still applies! 

 

Example:

  • You have $80,000 pre-tax and $20,000 after-tax in IRAs.

  • You convert $20,000.

  • Only 20% ($4,000) is tax-free. The remaining $16,000 is taxable.

The Five-Year Rule(s)

  • Each Roth conversion has its own five-year clock before penalty-free withdrawals are allowed (if you’re under age 59½).

  • This rule prevents people from converting and immediately withdrawing without paying taxes.

Timing Considerations

Conversions often make the most sense in years when income is temporarily lower, such as:

  • Early retirement years (before RMDs and Social Security).

  • Years with business losses or deductions.

  • Years when markets are down (converting at lower asset values reduces taxes owed).

State Taxes

State income tax applies to conversions unless you live in a no-tax state. High-income earners in states like California or New York need to weigh the state impact carefully.

 

Impact on Benefits

Roth conversions can:

  • Push you into higher Medicare premium brackets (IRMAA).

  • Increase the portion of Social Security benefits subject to tax.

  • Affect ACA healthcare subsidies for pre-Medicare retirees.

Strategic Approaches to Roth Conversions

 

Partial Conversions Over Several Years

Rather than converting a lump sum, spread conversions across several years. This avoids bracket spikes and allows you to “fill up” favorable tax brackets.

 

Bracket Management Strategy

Many investors convert just enough to reach the top of their current bracket - for example, converting up to the top of the 22% bracket, but not into the 24%.

 

Market Timing Strategy

Converting during a downturn means you pay taxes on lower asset values. When markets recover, all growth is tax-free.

 

Legacy Planning Strategy

High-net-worth investors who don’t need their retirement funds may convert specifically to pass on tax-free assets to heirs (who could find themselves in much higher tax brackets for a myriad of reasons). 

 

Coordinating with Other Income Sources

Plan conversions around when you’ll start Social Security, pensions, or RMDs. Proper sequencing can minimize lifetime taxes.

Who Should Consider a Roth Conversion?

 

Good candidates include:

  • Younger investors with decades of growth ahead.

  • Retirees in “gap years” before RMDs and Social Security.

  • High-net-worth families seeking estate planning advantages.

  • Anyone expecting higher future tax rates.

Less ideal candidates include:

  • Investors already in the highest tax brackets.

  • Those who will soon move to a lower-tax state.

  • People needing near-term access to funds.

Real-World Example

 

Let’s say you’re 60 years old, filing taxes single, with $80,000 in taxable income. That places you in the 22% federal tax bracket for 2025.

You decide to convert $50,000 from your IRA to a Roth.

  • Your taxable income rises to $130,000.

  • Part of the conversion spills into the 24% bracket.

  • Your federal tax bill increases by roughly $11,000 ($50,000 × blended ~22%).

If instead, you spread the conversion across two years: $25,000 each year, you might stay within the 22% bracket both times, lowering the effective tax cost.

 

Now imagine the $50,000 grows at 6% annually for 20 years:

  • If left in a Traditional IRA, withdrawals are taxed. At 25% future tax rates, your heirs might net ~$128,000.

  • If converted to a Roth, heirs withdraw the full ~$160,000 tax-free.

That $32,000 difference illustrates the long-term power of conversions.

Risks and Pitfalls

  • Converting too much in one year → unnecessary tax spikes.

  • Forgetting state taxes → higher bill than expected.

  • Triggering Medicare surcharges → costly IRMAA penalties.

  • Misunderstanding the five-year rule → penalties on early withdrawals.

  • Overlooking the pro-rata rule → surprise tax bills.

Final Thoughts

 

A Roth conversion can be a powerful tool for reducing lifetime taxes, creating retirement flexibility, and leaving a tax-free legacy. But it’s not a blanket solution. The right strategy depends on your current tax situation, future income expectations, and overall wealth plan.

 

At Masonboro Advisors, we specialize in helping investors and high-net-worth families design tax-efficient retirement strategies, including when and how to use Roth conversions. If you’d like to evaluate whether a Roth conversion is right for you, schedule a meeting today.