At Financial Services of America (FSA), one of the most common retirement questions we hear is: “Should I convert my traditional IRA to a Roth IRA?”
Like most financial decisions, the answer depends entirely on your personal tax situation, long-term goals, and retirement income strategy. Here’s what you need to know before you consider making the switch.
What is a Roth IRA Conversion?
A Roth IRA conversion involves moving money from a traditional IRA (or another eligible retirement account) into a Roth IRA. While traditional IRAs offer tax-deferred growth and tax-deductible contributions, Roth IRAs are funded with after-tax dollars—and qualified withdrawals in retirement are completely tax-free.
When you convert, you’ll pay income taxes on the amount transferred. The tradeoff? No required minimum distributions (RMDs), tax-free growth, and greater flexibility in retirement.
Why would someone consider converting to a Roth IRA?
There are several strategic benefits:
Tax-Free Withdrawals in Retirement
Once you meet the qualifications, distributions from a Roth IRA are completely tax-free. That gives you more control over your tax bracket in retirement.No Required Minimum Distributions (RMDs)
Unlike traditional IRAs, Roth IRAs don’t require you to withdraw a minimum amount each year starting at age 73. This allows your money to keep growing tax-free for longer.Estate Planning Benefits
Because Roth IRAs aren’t subject to RMDs, they can be an effective tool to pass on wealth to heirs with tax advantages.Tax Diversification
Having a mix of taxable, tax-deferred, and tax-free retirement accounts gives you more flexibility to adapt to future tax laws.
When might a Roth IRA conversion make sense?
You expect your tax rate to be higher in retirement
You have outside funds to pay the taxes on the conversion
You have a long time horizon before needing the funds
You want to reduce future RMD obligations
You want to leave tax-free assets to heirs
When might it not make sense?
You expect a lower tax rate in retirement
You don’t have the cash available to pay the tax bill
You need to access the converted funds within five years
The conversion pushes you into a higher tax bracket
Understand the Tax Impact
Conversions are considered taxable events. The amount you convert gets added to your income for the year. This could impact your tax bracket and eligibility for credits or deductions.Use a Phased Strategy
Many FSA clients choose to convert gradually over several years. This can help keep their income below key tax thresholds and reduce the tax bite each year.Work With Your Advisor
At FSA, we help clients calculate the optimal amount to convert each year based on their income, deductions, and retirement strategy.Complete the Paperwork
Your advisor will help you coordinate with your IRA custodian to complete the necessary forms and ensure a smooth transition.
What are the tax implications of a Roth conversion?
You’ll owe ordinary income tax on the converted amount, but not the 10% early withdrawal penalty—as long as the money is transferred directly into a Roth IRA and not withdrawn.
If the conversion amount is large, it could temporarily push you into a higher tax bracket. That’s why many clients at FSA use tax bracket management strategies to spread conversions over several years.
How does a Roth conversion support my retirement savings strategy?
A well-timed Roth conversion can create long-term tax savings and increase your flexibility in retirement. You gain more control over how and when you withdraw income, which is a critical piece of your overall retirement income plan.
It also supports:
Wealth management strategies
Tax-free retirement income planning
Protection against rising future tax rates
Estimate your conversion tax impact
Coordinate your conversion with your full retirement plan
Weigh current vs. future tax considerations
Understand how a conversion fits into your estate plan
Not sure about where you stand financially? Take FSA’s Free Retirement Quiz to see how prepared you are for retirement, where you may need to adjust your plan and what steps to take next.
Have questions about your Roth IRA or other retirement plan? Schedule a no obligation consultation with one of our trusted financial advisors to learn more and get you on a path toward retirement.