Roth Conversion Basics

What if you could pay the tax on your retirement savings while it’s cheap, and never pay it again? That’s a Roth conversion. You move money out of a traditional IRA, where it grows tax-deferred and gets taxed on the way out, into a Roth IRA, where it grows tax-free and comes out tax-free for the rest of your life.

How it works

You convert some or all of a traditional IRA to a Roth. The amount you convert lands on this year’s tax return as ordinary income, so you pay tax on it now, at today’s rates. After that, the money is done with the IRS. It compounds tax-free, you owe nothing when you withdraw it, and unlike a traditional IRA it carries no Required Minimum Distribution while you’re alive.

There’s no income limit on conversions. Anyone with a traditional IRA can do one, at any size, in any year.

A quick example

Say you retire at 63 with a low-income gap before Social Security and RMDs kick in. You convert $80,000. You pay tax on that $80,000 today. Twenty years later it might be worth $200,000, and every dollar of that growth comes out tax-free. You prepaid a known bill to erase a larger unknown one.

The part most people miss

A conversion isn’t free, and the bill is bigger than the income tax line. The converted amount counts toward your MAGI, so it can raise the tax on your Social Security and trigger IRMAA, the income-based surcharge on Medicare premiums two years later. Convert too much in one year and you push yourself into a higher bracket and a higher Medicare tier at the same time. If your IRA holds after-tax dollars, the pro-rata rule decides how much of your conversion is actually taxable, and it rarely works the way people hope.

When it pays off

The best window is the low-income valley in your 60s, after the paychecks stop and before RMDs begin. Convert enough to fill up the lower brackets, not so much that you spill into the next one or trip an IRMAA tier. Done right over several years, it shrinks the balance the IRS gets to tax later. For the full mechanics, see Roth conversions without triggering IRMAA.

A conversion is one of the few moves where you choose the year you pay the tax. Pick the cheap year.