Roth Conversion Strategy: When Moving Money to a Roth IRA Pays Off

In January 2025, a 62-year-old named Sarah left her job at a nonprofit. Her pension hadn't started. Social Security was still years away. For the first time in decades, her taxable income was going to be low. Really low. Around $20,000 from dividends and interest.

Her financial advisor saw the gap. Sarah had $500,000 in a traditional IRA. If she waited until age 73, required minimum distributions would force her to withdraw large amounts at potentially higher tax rates. But right now, in this low-income year, she could convert $43,475 from her traditional IRA to a Roth IRA and pay just 12% federal tax on every dollar.

That's the Roth conversion strategy: voluntarily paying taxes now, at a rate you choose, to guarantee tax-free growth and withdrawals later.

The quick version: A Roth conversion moves pre-tax IRA or 401(k) money to a Roth IRA. You pay income tax on the converted amount now, but the money grows tax-free forever. The strategy works best in low-income years when your tax rate is temporarily lower.

What Is a Roth Conversion?

A Roth conversion is a transfer of funds from a pre-tax retirement account (traditional IRA, SEP IRA, SIMPLE IRA, or 401(k)) to a Roth IRA. The converted amount is added to your taxable income for the year, and you owe ordinary income tax on it.

In exchange for that tax bill, the money now lives in Roth territory. It grows tax-free. Qualified withdrawals are tax-free. And there are no required minimum distributions during your lifetime.

You can convert any amount. There's no income limit on conversions (unlike Roth IRA contributions, which phase out at $150,000 to $165,000 MAGI for single filers in 2025). A person earning $500,000 who can't contribute directly to a Roth IRA can still convert unlimited amounts from a traditional IRA to a Roth.

One important fact: since 2018, Roth conversions are irreversible. The Tax Cuts and Jobs Act eliminated "recharacterization" of conversions. Once you convert, there's no undo button.

The Math: Filling the Bracket

The core strategy is elegant in its simplicity: convert just enough to fill up a low tax bracket without spilling into a higher one.

Sarah's Conversion (2025 Tax Year)

Sarah converts $43,475 from her traditional IRA to a Roth IRA.

Tax on the conversion:

• First $6,925 ($11,925 bracket limit minus $5,000 already taxed): 10% = $692.50
• Remaining $36,550: 12% = $4,386.00
• Total federal tax: $5,078.50

Sarah moves $43,475 into tax-free territory forever. The tax cost: about five grand. That's an effective rate of 11.7%.

If she waits until age 73, her pension ($30,000), Social Security ($24,000), and required distributions from a growing IRA could push her into the 22% or 24% bracket. Converting now at 12% saves her 10+ percentage points on every dollar she moves. Over $43,475, that's at least $4,347 in future tax savings, and the Roth balance keeps compounding without the IRS ever touching it again.

When Roth Conversions Make the Most Sense

Early retirement gap years. The period between leaving work and starting Social Security/pensions is golden. Income drops, tax brackets drop, and you have years of low-rate conversion available.

Market downturns. When your portfolio drops 30%, that's actually a great time to convert. You move more shares for the same tax cost, and the recovery happens inside the tax-free Roth. (The 2020 and 2022 dips were conversion goldmines for people paying attention.)

Before RMDs begin. Required minimum distributions start at age 73. Once they kick in, they add to your taxable income every year, potentially pushing you into higher brackets. Converting before RMDs start reduces the eventual RMD amounts.

When tax rates are historically low. Current rates (10% to 37%) are low by historical standards. The OBBBA made them permanent, but "permanent" in Washington has a shelf life. If you believe rates will eventually rise, locking in today's rates through conversion makes mathematical sense.

When you can pay the tax from outside the IRA. This is critical. If Sarah uses her checking account to pay the $5,079 tax bill, the full $43,475 moves to the Roth. If she takes $5,079 from the IRA to pay the tax, only $38,396 makes it to the Roth, and she may owe a 10% early withdrawal penalty on the $5,079 if she's under 59½.

The 5-Year Rules (Yes, Plural)

Roth conversions come with two different 5-year rules, and confusing them is one of the most common mistakes in retirement planning.

Rule 1: The earnings rule. To withdraw earnings from a Roth IRA completely tax-free, the account must have been open for at least 5 tax years AND you must be 59½ or older. This clock starts with your first-ever Roth contribution or conversion.

Rule 2: The conversion-specific rule. Each conversion has its own 5-year clock for penalty-free access to the converted principal if you're under 59½. Convert $50,000 in 2025? You can access that $50,000 penalty-free starting in 2030. This matters for early retirees building a "Roth conversion ladder" to access retirement funds before 59½.

If you're already 59½ or older, Rule 2 is basically irrelevant. You can access converted principal immediately with no penalty.

The Pro-Rata Rule Trap

If you have both pre-tax and after-tax money in your traditional IRAs, you can't cherry-pick which dollars to convert. The IRS requires you to treat all your traditional, SEP, and SIMPLE IRA balances as one pool when calculating the taxable portion of a conversion.

Example: You have $90,000 in pre-tax traditional IRA money and $10,000 in after-tax (non-deductible) contributions. Total: $100,000. If you convert $20,000, 90% ($18,000) is taxable and 10% ($2,000) is tax-free. You can't convert "just the after-tax money."

The workaround: roll your pre-tax IRA money into a current employer's 401(k) (if the plan accepts rollovers), leaving only the after-tax balance in the IRA. Then convert the after-tax amount with minimal tax impact. This is the "backdoor Roth" strategy, and it's perfectly legal, just fiddly.

The Medicare Premium Risk

Large conversions can trigger IRMAA surcharges on Medicare premiums two years later. A $100,000 conversion in 2025 shows up as income on your 2025 tax return, which Medicare uses in 2027 to set your premiums.

If the conversion pushes your MAGI above $212,000 (married) or $106,000 (single), your monthly Medicare Part B premium could jump from roughly $185 to $300 or more.

The workaround: spread conversions across multiple years to stay below IRMAA thresholds. Or, if the conversion was a one-time event, file an IRMAA reconsideration using Form SSA-44.

Your Next Move

1. Calculate your "room." Take the top of your target tax bracket, subtract your expected income and standard deduction. That's your optimal conversion amount. Use our tax bracket calculator to run the numbers.
2. Pay the tax from outside the IRA. Use savings, not the conversion itself, to cover the tax bill. This preserves the full converted amount.
3. Convert in stages. Don't try to convert your entire traditional IRA in one year. Spread it over multiple low-income years.
4. Check the IRMAA impact. If you're 63 or older, model how the conversion will affect Medicare premiums two years later.
5. Open the Roth early. The 5-year clock for earnings starts when you first fund any Roth IRA. Even a small $100 contribution now starts the timer.

For the broader picture of how investment taxes work, see our capital gains tax guide. And if you're looking for more December tactics, our year-end tax moves article includes Roth conversions as one of 12 strategies. For retirees specifically, what seniors actually owe on capital gains pairs naturally with conversion planning, since both depend on managing your taxable income in retirement.

References

1. Internal Revenue Service. (2024). Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs). IRS.gov. https://www.irs.gov/forms-pubs/about-publication-590-b
2. Fidelity. (2025). Roth IRA Income Limits. Fidelity.com. https://www.fidelity.com/learning-center/smart-money/roth-ira-income-limits
3. T. Rowe Price. (2025). Roth IRA Conversion: When Does It Make Sense?. TRowePrice.com. https://www.troweprice.com/personal-investing/resources/insights/when-to-consider-a-roth-conversion.html
4. Internal Revenue Service. (2024). Publication 590-B. IRS.gov.
5. Kitces, M. (2014/Updated). Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions. Kitces.com. https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
6. Internal Revenue Service. (2025). Form 8606: Nondeductible IRAs (Instructions). IRS.gov. https://www.irs.gov/pub/irs-pdf/i8606.pdf