Roth Conversions Explained

You’ve probably heard the term “Roth conversion” tossed around – on a podcast, in an article, maybe from a financial advisor. And if you’ve ever walked away thinking, I should probably know what that means, you’re not alone.

Here’s the real, jargon-free explanation – and more importantly, why this strategy gets so much attention from planners and advisors who understand how powerful it can be over time.

What Is a Roth Conversion?

A Roth conversion is when you move money from a pre-tax retirement account (like a traditional IRA or 401(k)) into a Roth IRA, where it can grow tax-free.

That may sound like a lateral move. But here’s the key: when you convert, you’re paying income tax now so you won’t have to pay it later. You’re essentially saying, let me settle the tax bill today, while I still control the timing and rate.

That tax control becomes a huge advantage down the line.

Why This Strategy Gets Taught to Advisors

In our advisor training, we emphasize that Roth conversions aren’t just about taxes. They’re about flexibility.

Once money is in a Roth IRA:

• It grows tax-free
• It can be withdrawn tax-free later (if you follow the rules)
• It’s not subject to Required Minimum Distributions (RMDs)
• And it can be passed to heirs tax-free under current law

In short, it’s one of the only ways you can pay a known amount today to eliminate unknown future tax risk. For many people, that’s a worthwhile trade.

But yes, there are rules.

What Are the Rules for Taking Money Out?

One reason Roth conversions get misunderstood is because people assume the money is just “free and clear” once it’s in a Roth. That’s mostly true if you leave it alone, but there are a couple of timing rules you should know upfront:

• The Five-Year Rule: When you convert, the IRS starts a five-year clock on that specific conversion. If you take the converted amount out before five years have passed and before you’re 59½, there’s a 10 percent penalty. That’s their way of saying “this is a long-term move, not a backdoor emergency fund.”
• The Age 59½ Rule: Once you’re over 59½ and past the five-year mark, you can take the money out – converted amount and any earnings – tax-free and penalty-free. That’s the end goal.

If you’re younger and planning to leave the money alone until retirement, these rules won’t get in your way. But they’re important if you think you’ll need the money sooner.

Still Lost? Let’s Walk Through an Example

Let’s say you’re 45 years old and decide to convert $20,000 from a traditional IRA into a Roth IRA. Here’s how it plays out:

• You’ll owe income tax on that $20,000 for the year you convert. That adds to your taxable income, so you want to plan ahead.
• A five-year clock starts on that converted amount. If you take it out before age 59½ and before the five years are up, the IRS adds a 10 percent penalty.
• After five years, you can take out that converted $20,000 with no penalty, even though you’re still under 59½. But the earnings from that $20,000 must stay put until you’re both over 59½ and five years out from your first Roth contribution or conversion.

If you’re not planning to touch the money until retirement, you’ll be in good shape. You lock in tax-free growth and remove future tax risk – two things your future self will thank you for.

When Does a Roth Conversion Make Sense?

It’s not one-size-fits-all. But here are a few times when it can be a smart move:

• Your income is temporarily lower – Maybe you just retired early, or took time off work, or had a lower-income year. That could mean converting at a lower tax rate than you’ll pay later.
• You want to reduce future RMDs – Once you hit age 73, traditional accounts force you to take taxable withdrawals. Roth IRAs don’t. Converting now can shrink your future RMDs and give you more control.
• You want to leave tax-free money to your heirs – Roths can be a cleaner way to pass money on without creating a tax burden for the next generation.

Common Mistakes to Avoid

• Not preparing for the tax bill – Converting without knowing how much tax you’ll owe is a rookie mistake. You need a plan to cover the taxes – ideally without dipping into the converted funds.
• Converting too much at once – A large conversion could push you into a higher tax bracket. That doesn’t mean it’s always bad but it might make more sense to spread it out over several years.
• Forgetting the Medicare impact – Big conversions can raise your income on paper, which might increase your Medicare premiums down the line. That’s not always a dealbreaker, but it needs to be factored in.

What to Ask Before You Convert

• What tax bracket would this put me in?
• Can I cover the tax bill without touching retirement savings?
• Is this a one-time move or part of a longer strategy?
• How does this affect other parts of my plan like RMDs, Medicare, or Social Security?

Bottom Line

Roth conversions are not flashy. They’re not urgent. But they’re one of the few chances you get to pay less tax later by making a smart decision now.

That’s why we teach advisors how to communicate this clearly. And that’s why we’re sharing it with you – because when done thoughtfully, a Roth conversion can quietly become one of the most powerful moves in your entire retirement plan.