Roth Conversion

Key Takeaways

• Roth conversion transfers pre-tax retirement funds to a Roth IRA, triggering immediate taxation but enabling tax-free growth and qualified withdrawals
• Conversion deadline is December 31 of each tax year, with no extensions available, unlike contributions which can be made until the tax filing deadline
• No annual limit exists for Roth conversions, unlike contributions which are capped at $7,000 for 2025 ($7,500 for 2026) plus catch-up amounts
• For 2025, Roth IRA contribution phase-outs begin at $150,000 for single filers ($236,000 MFJ), increasing to $153,000 ($242,000 MFJ) for 2026
• IRMAA cliff effects can significantly increase Medicare premiums when conversion income pushes modified adjusted gross income above threshold levels
• The 5-year rule for Roth conversions applies separately to each conversion and affects penalty-free access to converted amounts before age 59½
• Roth conversions can reduce future RMDs since Roth IRAs are not subject to required minimum distributions during the owner's lifetime
• Comprehensive financial planning software like MaxiFi can model complex conversion scenarios including tax bracket optimization, IRMAA effects, and lifetime tax projections

What Is a Roth Conversion?

A Roth conversion moves assets from pre-tax accounts (such as a traditional IRA, SEP IRA, SIMPLE IRA, or eligible employer plan like a 401(k)) into a Roth IRA. The converted amount is included in taxable income for the year of conversion, but future qualified distributions from the Roth IRA are completely tax-free.

Unlike Roth IRA contributions, which are subject to income limits (phase-outs begin at $150,000 for single filers and $236,000 for married filing jointly in 2025), Roth conversions have no income restrictions. High-income individuals who cannot make direct Roth IRA contributions can still convert pre-tax retirement assets to Roth IRAs regardless of their income level.

Importantly, there is no annual limit on Roth conversion amounts. While Roth IRA contributions are capped at $7,000 for 2025 ($8,000 for those age 50 and older), individuals can convert any amount from pre-tax accounts in a single year. The primary constraint is the tax liability generated by the conversion, which must be evaluated against current and projected future tax situations.

For 2026, the IRS has announced increased limits: the standard Roth IRA contribution limit rises to $7,500 ($8,600 for those age 50 and older), and income phase-out ranges increase to $153,000-$168,000 for single filers and $242,000-$252,000 for married filing jointly.

How Roth Conversions Work

The mechanics of a Roth conversion involve several steps and considerations that affect tax treatment and timing.

Transfer Methods

Roth conversions can be executed through three primary methods. A direct trustee-to-trustee transfer moves funds directly from the traditional IRA custodian to the Roth IRA custodian, avoiding any withholding. A same-trustee transfer occurs when both accounts are held at the same financial institution, often accomplished through a simple internal transfer or redesignation. An indirect rollover involves receiving a distribution from the traditional IRA and depositing it into a Roth IRA within 60 days, though the original custodian must withhold 20% for taxes on distributions from employer plans.

Tax Treatment

The converted amount is added to ordinary income for the tax year of conversion. For traditional IRA conversions consisting entirely of pre-tax contributions and earnings, the full amount is taxable. If the traditional IRA contains after-tax (non-deductible) contributions, the pro-rata rule applies, requiring a proportional calculation of taxable and non-taxable amounts based on all traditional IRA balances.

Conversion Deadline

The deadline for Roth conversions is December 31 of the tax year. Unlike IRA contributions, which can be made until the tax filing deadline (typically April 15 of the following year), conversions must be completed by year-end to count for that tax year. There are no extensions available for conversions. This timing distinction is important for year-end tax planning.

How to Start a Roth Conversion

The process for initiating a Roth conversion varies by financial institution but generally follows these steps:

1. Open a Roth IRA if one does not already exist at the desired custodian
2. Contact the financial institution holding the traditional IRA or employer plan to request conversion forms
3. Specify the conversion amount (partial or full conversion)
4. Elect tax withholding preferences (paying taxes from external funds is generally discussed as preferable to maximize the converted amount)
5. Complete the transfer before December 31 of the desired tax year

For 401(k) conversions, individuals must first confirm the plan allows in-service distributions (if still employed) or have separated from the employer. Many individuals roll 401(k) assets to a traditional IRA first, then convert from the traditional IRA to a Roth IRA.

2025 vs 2026 Roth IRA Contribution Limits Comparison

The following comparison reflects IRS-announced contribution limits for 2025 and 2026. These limits apply to Roth IRA contributions only. Roth conversions have no annual limit in either year, meaning individuals can convert any amount of pre-tax retirement assets regardless of these contribution caps. Individual eligibility for contributions depends on filing status, income level, and other factors.

Note: While Roth IRA contributions are subject to the annual limits and income phase-outs shown above, Roth conversions bypass these restrictions entirely. There is no income limit for performing a Roth conversion, and there is no cap on the amount that can be converted in any given year.

When Roth Conversions Are Commonly Discussed

Retirement planning literature commonly references several scenarios where Roth conversions may be evaluated:

Lower-income years: Years with reduced income (between retirement and Social Security claiming, sabbaticals, or career transitions) may offer opportunities to convert at lower marginal tax rates.

Early retirement: The period between retirement and age 72-75 (when RMDs begin) is commonly discussed as a potential conversion window before required distributions increase taxable income.

Tax diversification: Having both pre-tax and Roth assets provides flexibility to manage taxable income in retirement by choosing which accounts to draw from.

RMD reduction: Converting traditional IRA assets reduces future RMD amounts since Roth IRAs are not subject to required minimum distributions during the owner's lifetime.

Estate planning: Roth IRAs can provide tax-free inheritance to beneficiaries, though the 10-year distribution rule under SECURE Act applies to most non-spouse beneficiaries.

Potential Benefits and Considerations

Potential Benefits

• Tax-free growth and qualified withdrawals after conversion
• No required minimum distributions during owner's lifetime
• No income limits for conversions (unlike Roth IRA contributions)
• Tax diversification in retirement
• Potential tax-free inheritance for beneficiaries

Considerations and Potential Drawbacks

• Immediate tax liability on converted amount
• Conversions are irrevocable (no recharacterization since 2018)
• May trigger IRMAA surcharges on Medicare premiums
• Could increase taxation of Social Security benefits
• 5-year rule applies to each conversion for penalty-free access before age 59½
• Pro-rata rule complicates conversions when non-deductible contributions exist

The Complexity of Roth Conversion Optimization

Determining optimal Roth conversion amounts involves far more complexity than simply "filling up" a tax bracket. The decision interacts with multiple factors that change over time and affect each other in non-linear ways.

IRMAA cliff effects can create situations where an additional dollar of income triggers thousands of dollars in additional Medicare premiums. Social Security taxation thresholds create effective marginal rates that differ from stated bracket rates. State tax considerations add another layer of complexity. Future tax law changes introduce uncertainty into multi-year projections. The interaction between RMD calculations, investment returns, and conversion timing creates path dependencies that simple rules cannot capture.

As economist Larry Kotlikoff has noted, retirement planning involves optimization problems that extend across decades and require modeling the complete financial picture rather than isolated decisions. Generic conversion strategies that work for one household may be entirely inappropriate for another with different income sources, asset levels, health situations, and goals.

Comprehensive financial planning software like MaxiFi (www.maxifi.com) can model these complex interactions, projecting year-by-year tax implications, IRMAA effects, Social Security taxation, and lifetime spending power under different conversion scenarios. Rather than relying on rules of thumb, individuals can see how various conversion strategies affect their specific financial situation over their projected lifetime.