Roth conversions

A Roth conversion moves money from a pre-tax retirement account into a Roth account. You pay ordinary income tax on the converted amount now, in exchange for the potential of tax-free growth and qualified withdrawals later.

Why convert

• You expect to be in a higher tax bracket later.
• You want to reduce future required minimum distributions — Roth IRAs have none for the original owner.
• You want tax-free assets for heirs.
• You have a low-income year that leaves room in a lower bracket.

The tax bill

The converted amount is added to your taxable income for the year. Converting a large sum can push you into a higher bracket, raise Medicare premiums, or affect credits — so many investors convert in measured amounts across several years, a practice called bracket filling. Pay the tax from outside funds where possible; using the retirement account itself reduces the benefit and can add penalties.

The pro-rata rule

If you hold both pre-tax and after-tax (nondeductible) dollars across your traditional IRAs, you cannot convert only the after-tax portion. The taxable share of any conversion is prorated across all your traditional IRA balances. This is the rule that surprises people attempting a backdoor Roth. Requires tax review

Two different five-year rules

Roth accounts have two separate five-year clocks: one that determines whether earnings come out tax-free, and one that applies to each conversion for the early-withdrawal additional tax. Each conversion starts its own five-year period for penalty purposes.

The backdoor Roth

High earners who cannot contribute to a Roth directly sometimes make a nondeductible traditional IRA contribution and convert it. Whether this is nearly tax-free depends entirely on your other pre-tax IRA balances through the pro-rata rule.

FAQ

Sources include the Internal Revenue Service and U.S. Department of Labor. This guide is general information, not tax or legal advice; confirm specifics with a qualified professional.

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