A Roth conversion — moving money from a traditional, SEP or SIMPLE IRA (or an eligible employer plan) into a Roth IRA — is one of the most powerful tax-planning moves an investor can make, but it is not a no-brainer.
Conversions trigger ordinary income tax on pre-tax balances in the year you convert, they are irreversible for conversions made after 2017, and they carry timing- and account-specific rules (including a conversion five-year clock).
For savers sitting on large tax-deferred balances and worried about higher future tax rates, the potential to lock in tax-free growth and tax-free withdrawals in retirement can be compelling — but the upfront tax bill and interaction with other tax items (Medicare premiums, Social Security taxation, AMT-type considerations) mean the decision should be personalized and modeled.
What Is a Roth Conversion?
A Roth conversion involves transferring funds from a pre-tax retirement account — such as a traditional IRA, 401(k), 403(b), SEP IRA, or SIMPLE IRA (where allowed) — into a Roth IRA. Because those original assets were tax-deferred, the full (or partial) converted amount is included as taxable ordinary income in the year of conversion.
Once inside the Roth IRA, further growth and qualifying distributions can be tax-free, provided certain holding and withdrawal requirements are met. The appeal is straightforward: pay tax now, and enjoy tax-free earnings and withdrawals later (rather than deferring tax until retirement). But this strategy imposes a real upfront cost, and whether it “pays off” depends heavily on your tax situation, time horizon, and expectations for future rates.
Roth IRA Contribution Eligibility & the Conversion Workaround
For direct Roth IRA contributions, the IRS enforces income limits: in 2025, single filers see a phase-out between $150,000 and $165,000 of modified adjusted gross income (MAGI), while married couples filing jointly phase out at $236,000 to $246,000. If your income exceeds those thresholds, you cannot contribute directly to a Roth. However, the Roth conversion offers a workaround: you can make nondeductible contributions to a traditional IRA and then convert those to a Roth (a “backdoor Roth”) — paying tax on earnings or pre-tax portions. This technique gives high-earners access to the Roth vehicle even if they surpass direct-contribution limits.
Because conversions do not have income restrictions, anyone holding a traditional IRA (or eligible employer plan amount) may convert regardless of MAGI — making the backdoor route legally viable. But the tax consequences and rules (e.g. pro rata basis rules) must be navigated carefully when executing this strategy.
Who Can Convert: Account Types & Constraints
Virtually any traditional IRA owner may convert to a Roth, regardless of income. Other retirement vehicles may also permit conversion — for instance, 401(k) or 403(b) balances (if the plan allows in-service rollovers) can sometimes be moved into a Roth IRA, with taxes applied. SEP IRAs and SIMPLE IRAs are generally convertible, but SIMPLE IRAs impose a two-year participation period before conversion is permitted. One caveat: conversions are irrevocable (no recharacterization) post-2017, so once you convert, you cannot undo it. That makes timing, planning, and modeling essential.
The Five-Year Rule & Withdrawal Timing
A key technical constraint: each conversion has its own five-year clock for penalty-free distributions of converted principal (if you are under 59½). That means even if you already hold a Roth, a new conversion executed in 2025 starts a fresh five-year countdown (from January 1 of the conversion year). If you withdraw converted amounts (not earnings) before the five years pass, you may incur a 10% early-withdrawal penalty (unless exceptions apply). Thus, if you anticipate needing access to funds in the near term, a conversion may be less attractive.
Further, while Roth IRAs have no required minimum distributions (RMDs) during the original owner’s lifetime (a major advantage over traditional IRAs), beneficiaries still must adhere to RMD rules post-inheritance (depending on when the IRA was opened).
Why Roth Conversions Can Be Attractive
The conventional wisdom states: convert if you expect your future tax rate to be higher than your current rate. But Vanguard’s recent “BETR” (Break-Even Tax Rate) framework adds nuance by modeling the marginal threshold where converting becomes neutral (neither better nor worse) — and often shows that conversions are beneficial in more scenarios than simple rule-of-thumb logic suggests.
The BETR approach factors in how the conversion tax is paid (from within the IRA or from a separate taxable account), the IRA’s basis (nontaxable contributions), and future “backdoor Roth” potential. Because these inputs shift the break-even threshold, an investor might decide to convert even if they expect a lower future tax rate — provided the BETR is lower still.
As one illustrative scenario suggests: assume a client has a 35% marginal tax rate today; if the conversion tax is paid from a tax-inefficient taxable account, the BETR might drop to ~23.5%. In that case, conversion remains favorable even if their future rate falls to, say, 25% — since that future rate still exceeds the BETR.
Another point: if you pay the conversion tax from outside the IRA (using assets in a taxable account), you preserve more of your IRA capital to grow in the Roth environment. That has a significant compounding effect over long time horizons, improving the leverage of conversions.
Beyond the tax math, trends in retirement planning support the growth of Roth usage. According to Vanguard’s How America Saves 2025 report, 86% of employer-sponsored plans now offer a Roth option, and participation in Roth contributions reached record highs — indicating rising investor interest in tax-diversified strategies.
Roth in-plan conversions (RIPCs) are also gaining traction: 36% of plan clients allow in-plan conversions, and 10% of plans offer automatic RIPC features. That suggests institutional recognition of the value clients place in shifting balances to Roth-like growth paths.
A spider diagram illustrating the key benefits of a Roth IRA, from tax-free growth to retirement flexibility.
Potential Downsides, Risks & Tax Interactions
Despite the upside, you cannot ignore the downsides and interactions. The most obvious is the immediate tax burden: converting a large amount in a single year may push you into a higher tax bracket, increasing not just conversion taxes but taxes on other income. Moreover, adding conversion income can affect Medicare Part B/Part D premiums (via IRMAA), taxation of Social Security benefits, and eligibility thresholds for various deductions and credits — producing “tax shock” effects beyond just the conversion itself.
Also, the irrevocable nature of modern conversions (no recharacterization) means you must be confident in your assumptions. Market volatility can further complicate matters: converting just before a downturn means you lock in a higher tax on a now-lower account value, which reduces conversion efficiency. Mistiming can erode benefits.
Another constraint is the pro rata rule in IRA basis accounting. If your traditional IRA contains both deductible (pre-tax) and nondeductible (after-tax) contributions, the conversion must use a pro rata allocation, meaning some portion may still be taxable. Thus, if you have mixed basis, the calculation becomes more complex.
Liquidity is a key factor too: if you lack non-IRA funds to pay the tax, you might feel forced to withdraw from the IRA, which can trigger additional taxes or penalties (especially if you are under age 59½). Using IRA funds to pay the conversion tax reduces the capital you place into the Roth and undermines future growth.
Finally, market and tax policy risk must be weighed: future changes in tax law or bracket structure — not to mention changes in capital gains or dividend tax rates — could alter whether your conversion was “correct” in hindsight.
Should You Convert? A Framework for Decision
Rather than a binary yes/no, many advisors now encourage partial or staged conversions across multiple years. This spreads the tax load, helps manage bracket transitions, and allows flexibility if circumstances shift. In fact, the BETR framework is often used in conjunction with this incremental approach, identifying a “conversion zone” in which converting is favorable without overcommitting in a single year.
Begin by estimating your current marginal tax rate and your likely marginal rate in retirement (or when withdrawals begin). Then run a break-even analysis (BETR) to see the threshold at which conversion “makes sense.” Adjust for whether you can pay taxes from a separate taxable account, the basis in your IRA, and any future backdoor Roth plans. Also model the effects of Medicare surcharges, Social Security tax impacts, and RMDs if you remain in a traditional balance. If your future expected rate comfortably exceeds the calculated BETR in most scenarios, a conversion (or a series of conversions) is more justified.
The longer your time horizon, the more value you capture from tax-free compounding — and the lower your BETR tends to be. Conversely, if retirement is imminent or you suspect your rate will decline significantly, conversion may be less compelling.
People Also Ask
Is a Roth IRA conversion worth it in 2025?
Whether a Roth IRA conversion is worth it depends on your tax situation, time horizon, and future income expectations. If you believe your tax rate will be higher in retirement, converting in 2025 could help you lock in today’s tax rates and enjoy tax-free withdrawals later. The BETR framework shows that conversions can sometimes be advantageous even if your tax rate drops slightly in retirement, provided the conversion tax is paid from outside funds.
Do Roth conversions affect Medicare premiums?
Yes. The taxable income generated by a Roth conversion is included in your modified adjusted gross income (MAGI) and can push you into a higher Medicare premium bracket. This can result in increased Part B and Part D costs (known as IRMAA surcharges). For retirees near the income thresholds, a large one-year conversion could raise premiums for at least two years.
How long do I have to wait to withdraw money after a Roth conversion?
Converted funds are subject to a five-year holding period, separate from the five-year rule for Roth contributions. This means each conversion has its own five-year clock before converted principal can be withdrawn penalty-free if you are under age 59½. If you withdraw earlier, you may face a 10% penalty unless an exception applies.
Can I do a Roth conversion after age 73?
Yes, you can convert to a Roth IRA at any age, even after required minimum distributions (RMDs) begin. However, you must first take the RMD for the year before converting additional funds. Since Roth IRAs do not require lifetime RMDs, converting after age 73 can still make sense for estate planning or tax diversification, though the benefit depends on your tax bracket and heirs’ situations.
Conclusion
Converting traditional IRA or employer-based retirement assets into a Roth IRA can be a highly effective strategy for tax diversification, retirement flexibility, and estate planning — but it is not universally ideal. The upfront tax cost, irrevocability of conversions, and nuanced interactions with Medicare, Social Security, and tax thresholds make it necessary to approach the decision with careful modeling and scenario analysis.
The BETR framework helps refine the conventional wisdom — illustrating that conversions may be favorable in more circumstances than a simple “future-tax-higher-than-now” rule suggests. Because of that, many investors find a partial, staged conversion strategy, guided by BETR and supplemented with retirement tax projections, to be the most prudent path forward.
If you like, I can now build a sample “before and after” projection using your own numbers (current bracket, IRA balance, time to retirement) to show whether a Roth conversion is likely to add value in your situation. Would you like me to run that for your profile?
