The Benefits of a Roth IRA Conversions

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning

June 16, 2025

Diversification is a foundational principle for asset allocation and can lead to less risky and more efficient portfolios. Tax diversification strategies—consisting of a mix of taxable, tax deferred and nontaxable accounts with varying rules for taxation and withdrawals—can help mitigate the impact of higher future tax rates. For example, you can coordinate taxable and tax-free withdrawals to minimize income taxes in retirement through ownership of both traditional IRAs and Roth IRAs.

A Roth IRA conversion allows you to move all or a portion of your retirement savings from a traditional retirement account to a Roth IRA.¹ Although you will be required to pay current income tax on the Roth IRA conversion amount, conversion may be advantageous if you believe you will be in the same or higher tax bracket (federal and/or state²) when you make future withdrawals. While the conventional wisdom in the past has been that taxpayers would be in a lower income tax bracket in retirement than during their working years, there currently are good reasons to expect income tax rates to rise in the long term. Accelerating income by converting all or part of a retirement account to a Roth may be an advantageous strategy for wealthy individuals concerned about higher tax rates when they retire. It also helps a taxpayer on Medicare pay lower premiums by having a lower income in retirement, and can help the taxpayer qualify for other income-based tax benefits.

An Analysis of the Benefits

A Roth conversion can be beneficial when a traditional retirement account owner will not need the funds for a source of income in retirement and expects tax rates to be higher when they or their beneficiaries receive distributions from the retirement account.

Break-even year is the future year at which the after-tax withdrawal value would be the same in both the no-conversion and conversion scenarios.

Assumptions: client aged 55, spouse age 55; net worth $10,000,000; traditional IRA value pre-conversion $1,000,000 with no basis; tax rate 35% in year of conversion, 37% after conversion; earnings assumptions 6% annually; life expectancies based on IRS tables. Post-tax calculations take into account the impact of income taxes and income with respect to a decedent but exclude estate taxes. Analysis incorporates the "opportunity cost“ and takes into account the value and growth of outside assets that might have been used to pay the income taxes on the Roth conversion amount and reinvestment of the after-tax value of required minimum distributions not allocated for retirement income cash flow after age 73.

In addition to tax, a long time horizon is an important factor to consider before implementing a conversion. In the analysis above, nearly 20 years were required to break-even for a 55-year-old individual. All things being equal, an older individual would realize the benefits of a conversion quicker since they are able to avoid required minimum distributions sooner. Last, the tax benefits of a Roth may be further extended to when beneficiaries receive distributions.

Benefits of a Roth Retirement Account

Roth retirement accounts have the same ability to grow tax-free as traditional retirement accounts. However, with a Roth, the assets are not subject to tax when withdrawn by the account owner or the beneficiary as long as the Roth has been open five years or longer. There are no required minimum distributions for the account owner or the surviving spouse as a beneficiary (if the spouse rolls over the account), so the assets can stay in the Roth until after the death of the survivor if not needed for support in retirement. This longer period of tax-free appreciation can significantly enhance the value available for descendants.

It's Not All Or Northing

You can also complete a partial conversion of a retirement account. The tax impact of a smaller, partial conversion will be easier to mitigate by making charitable donations, harvesting tax losses or accelerating deductions. Doing this in a year when your overall taxable income is lower than it otherwise would be, such as when you change jobs or in the year of retirement, can also put you in a lower tax bracket and reduce the tax cost of the Roth conversion.

If you have made both taxable and non-taxable contributions to any traditional IRA and don’t convert the entire amount, the amount you convert is deemed to consist of a pro-rata portion of the taxable and nontaxable dollars across all IRAs. However, it is possible to simultaneously convert the non-taxable contribution portion to a Roth IRA and the taxable contribution portion to a traditional IRA to avoid this.

Add Flexibility Through Tax Diversification

A conversion allows you to diversify exposure to income taxes rates. You can achieve tax diversification by maintaining a mix of taxable, tax deferred (401(k)/IRA) and tax-exempt accounts (Roth 401(k)/Roth IRA) with varying rules for taxation and withdrawals, which can help mitigate the impact of potentially higher future tax rates. Distributions from tax-deferred accounts such as traditional IRAs or 401(k)s are taxed at ordinary income tax rates, while qualified distributions from tax-exempt accounts such as Roth IRAs are not taxed. Additionally, distributions are required from traditional IRAs starting at age 73 (or later, depending on the owner’s birth year) whereas Roth IRAs do not require distributions. Coordination of taxable and tax-free withdrawals in the future can help to minimize income taxes in retirement through ownership of both traditional IRAs and Roth IRAs.

Market Volatility

Where a Roth conversion otherwise makes sense, executing a conversion when asset values are lower can reduce the tax cost. The value of your converted holdings will likely increase as markets recover. This increase would take place in your Roth IRA as tax-free growth. Taking advantage of market volatility can be extremely advantageous to conversions, and when market volatility inevitably occurs in the future, be prepared to take advantage of the next drawdown.

An analysis of facts and circumstances is always required to determine if it makes sense for each individual’s situation. Meet with an experienced advisor to prepare now for higher taxes so that you can be intentional and take action.