Is there an optimal time to convert a traditional IRA or old 401(k) to a Roth IRA? While a Roth conversion may never make sense for some individuals, for others, early retirement years may be the best time to convert pre-tax accounts to tax-free Roth. Your current and projected future tax rate is often a main component of the decision, but there are other considerations and benefits as well.
Converting a traditional IRA to a Roth doesn’t make sense unless you have cash to pay taxes without dipping into your retirement savings. Depending on your taxable income, cash flow needs, and other factors, there may be certain years that are the best time for Roth conversions.
This article will cover:
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- Potential benefits and considerations with Roth conversions
- How to find the best time to convert an IRA or 401(k) to a Roth IRA
- Other options for an old 401(k)
Why convert a traditional IRA to a Roth IRA? 4 key benefits.
When there’s an opportunity to take advantage of current tax rates depending on your income level, conversions allow taxpayers to move money from before tax retirement accounts growing tax-deferred to after tax dollars growing tax free.
This approach typically provides greater benefits to those who have significant assets and high taxable income in retirement.
4 main benefits of converting an IRA or 401(k) to a Roth IRA:
Generally, converting to a Roth IRA offers several key benefits.
1. No required minimum distributions (RMDs) for the original account owner
Unlike IRAs and qualified retirement plans, a Roth IRA is unique in that required minimum distributions are not required during the original account owner’s lifetime. A spouse may also elect to defer RMDs if they inherit the account.
2. Tax-free withdrawals
Five years after the year in which you make a Roth conversion or first open the account you’re able to withdraw funds for qualifying events without a penalty. Further, withdrawals are considered to be made from after-tax contributions and conversion dollars first; earnings last. Funds that have already been taxed won’t be subject to double-taxation. If you wait until age 59 1/2 to take money out of a Roth IRA and have passed the more than five years holding period, then your investment earnings and growth will also be tax-free!
3. Inheritance and estate planning
There are a couple ways a Roth IRA conversion can assist with estate and legacy planning. First, the account will pass onto an heir totally income tax-free, if the holding period has been met by the decedent. Note: most beneficiaries who inherit a retirement account from a non-spouse can no longer ‘stretch’ the distributions over their lifetime. Instead, they have to take the funds in 10 years.
Second, although the value of retirement accounts may still be subject to estate tax (which can be as high as 40% federally), by pre-paying tax on converted funds during life, it may serve to reduce your estate. The federal estate tax exemption is nearly $14M per person in 2025.
4. Reduce your tax bill in retirement
For investors facing higher income tax brackets in retirement due to the impact of RMDs, after tax money in a Roth can provide needed tax diversification and flexibility. Reducing large IRA or 401(k) accounts through systematic or multi-year conversions can reduce required minimum distributions, thereby lowering regular income taxes and potentially reducing or avoiding other income-based taxes such as the 3.8% Medicare surtax or Medicare premiums (part B and D).
When a Roth conversion doesn’t make sense
Since a Roth conversion will increase your ordinary income, it isn’t always advantageous as it can push you into a higher tax bracket. Always consider the specifics of your tax situation and financial goals. Discuss the conversion process with your financial advisor and the tax implications with your tax advisor.
As explained earlier, the tax due will depend on the converted amount and your tax bracket in the year of conversion. Therefore, this strategy is best for individuals in a lower tax bracket relative to future expectations.
Here are some common examples of when a conversion may not be the best course of action:
- You don’t have other cash (not in retirement assets) to pay the conversion taxes
- You’ll need to withdraw money from retirement assets soon for living expenses and expect pre-conversion RMDs will not be sufficient to meet cash needs
- The additional taxable income will push you into a higher bracket than you think you would be in retirement without taking action
- You are in your peak earning years
- If you expect your maximum post-conversion Roth account balance to be rather small relative to your other investment assets, it may not justify paying income taxes early
When’s the best time to convert an IRA or 401(k) to a Roth?
There are many situational events and fact patterns that can create an optimal environment, especially a Roth conversion in retirement when the tax impact can be offset or reduced by the lack of significant ordinary income.
Here are some situations that may indicate that it could be a good time to consider this strategy:
- You’re recently retired with plenty of cash in the bank and a multi-year runway before RMDs and Social Security benefits
- After relocating to (or before moving out of) a tax-free state like Florida
- If you unexpectedly lost your job or are going to be in a low tax bracket for other reasons, it may make sense to convert in the current year if your financial safety net is there
- If your traditional IRA suffers losses in the stock market, there’s an opportunity to convert shares to a Roth IRA while the value is lower
Do the math
To figure out if it makes sense to convert to a Roth, you have to do the math and run the numbers in coordination with your financial and tax professional.
In working with clients, we use tools to simulate the impact of converting different amounts from an IRA or 401(k). We can work to stay under the next highest marginal tax bracket or do multi-year conversions to minimize the tax hit. This also helps illustrate the breakeven period and potential reduction of RMDs.
Other 401(k) rollover options
You may consider rolling over an old 401(k) to a Roth IRA, which is properly described as a Roth conversion. But that’s not your only option.
401(k) rollover to IRA
The most common option is a 401(k) to IRA rollover. The tax treatment of an IRA is the same, so you will continue to defer taxes on the account like you were with the 401(k). Direct rollovers from one financial institution to another are tax and penalty free.
Keep the money in your old 401(k) plan
Generally, if a participant’s account is over $7,000 the employer must allow the former employee to remain in the 401(k) plan. Before deciding to keep your 401(k) for the long term, make sure you are happy with the investment options, plan fees, services, etc.
Transfer to your new employer’s 401(k) plan
If you are still working and your new employer allows it, you can move the funds from your old plan into your new one. It can be easier to manage your investments when they are all in one place, which makes this a good option for some. Keep in mind, you still may be limiting yourself regarding investment choices and expenses could be higher too.
Retirement tax planning with Roth conversions
There is no one-size-fits-all approach to retirement planning or investing, which is important to keep in mind as Roth conversion strategies gain popularity due to expiring tax cuts. Roth conversions may play a large part in maximizing future wealth for some investors. Consider your next steps carefully and find a strategy that is consistent with your retirement planning goals and wealth management objectives.
[Last reviewed April 2025]
