4 Reasons You Should Use Roth IRA Conversions
One of the greatest financial planning gifts that Congress and the IRS have ever given us is the Roth IRA.
Roth IRAs allow you to make after-tax contributions to a retirement account. There is no tax deduction for the contribution, but all earnings and withdrawals after that are completely tax free.
The reason this is valuable is because it gives us the flexibility to choose when we pay taxes on our retirement savings.
Prior to the arrival of the Roth IRA, the primary option for making contributions to a retirement account was on a tax-deferred basis.
This was great if you were in a high-income tax bracket anyway. Of course, the tax deduction would be helpful if you have a high income.
But if you were in a low bracket and weren’t facing a big income tax bill then you wouldn’t benefit as much as those with high incomes because you would have paid less in taxes anyway.
The introduction of Roth IRAs gave everyone the option to choose when they pay income taxes on their retirement savings; either upon contribution or upon withdrawal.
Naturally, if you’re in a high tax bracket today then traditional contributions are probably more valuable than Roth contributions, but if you’re in a low tax bracket then Roth will probably serve you better.
But retirement contributions are not the only way Roth IRAs benefit us.
Another option they provide is the ability to convert tax-deferred assets, like those in a Traditional IRA, to a Roth IRA.
This is called a Roth Conversion and it is another great tool for decreasing your income tax liability.
Let’s walk through 4 scenarios where Roth Conversions might make a lot of sense.
1) You have a large tax-deferred balance
Honestly, this is the primary Roth conversion requirement regardless of the other reasons I’ll be providing below.
If you don’t have a basket of tax-deferred assets (like Traditional IRAs, 401(k)s, 403(b)s, 457s, etc.) that cause concern about when you reach the age of Required Minimum Distributions, then you can stop reading now. You won’t need to do Roth Conversions.
However, when you look at your tax-deferred retirement accounts and the thought of being forced to withdraw around 4% of that balance when you turn 73 or 75 makes you a little nauseous because of the tax consequences, then you are probably a good conversion candidate.
Think about it this way. Suppose you have accumulated $2.5 million in an IRA.
Assuming your RMD age is 75, when you reach that point in life, the IRS will force you to withdraw $101,626 ($2.5MM divided by 24.6 from the IRS’ Uniform Lifetime Table)from your account and it will all be taxable as income.
If you need $101,626 to cover your living expenses, then you don’t have a problem.
However, if you don’t need that much money to live on then RMDs are going to force you to expose at least some portion of your assets to income tax that you don’t even need.
In 2025, the top of the 22% bracket for a single filer is $103,350 in adjusted gross income. The top of the 12% bracket is $48,475.
So, what if you only needed $48,475 but had to remove $101,626? You’d potentially owe $11,693.22 in taxes for income you didn’t even need.
Or here’s a different conundrum, in 2026 income tax brackets are set to revert to their pre-2018 rates.
The 12% bracket could jump back up to 15%. The 22% bracket will jump to 25% and the 24% bracket will hop up to 28%.
By converting tax-deferred dollars into a Roth now you could avoid exposing those dollars to higher tax rates in the future.
2) You are in a low-income year
Since Roth Conversions are a taxable event, it makes the most sense to do them when your income taxes are at their lowest.
This is why most people wait until they are retired to start doing Roth Conversions, using the years between their retirement and RMD age to move as much as they can.
One under-appreciated aspect of retirement is the level of control you could have over the amount of income, and thus income taxes, you realize.
But you could also have a year when your income taxes will be lower due to some other reason like a layoff, leave of absence, job change, or a spouse who retires.
Whatever the case, if you know your adjusted gross income will be low compared to other years then it could be a great opportunity to convert some of your assets to a Roth.
3) The Market is in the Ditch
Nobody truly enjoys a downturn in the market, but when it does happen savvy investors look for opportunities to make lemonade from sour economic conditions.
And, because the assets in your retirement accounts are likely to be somewhat depressed during a market swoon, it means that conversions will come with a lower tax impact than when your assets were at peak values.
Think of it as a sale on the cost of Roth conversions.
Then, when the market recovers, all the new gains will be in a Roth account where you can enjoy them tax-free forever.
4) Legacy Planning
If you want to be especially kind to your heirs, you can do them a favor by converting as many of your assets to Roth as possible.
This will spare them the tax consequences of inheriting an IRA that will be taxed at their income tax rates as they remove money from the account.
Another legacy planning consideration is how successful your heirs are.
Since they will have to pay income taxes on any tax-deferred assets they inherit, it makes the most sense to withdraw money from tax-deferred accounts when they are in the hands of the person with a lower adjusted gross income.
If your kids are successful, this might mean you can spare a chunk of their inheritance from income taxes by converting to Roth before you pass away.
On the other hand, if your kids are in low tax brackets then there’s no reason to convert to a Roth at your higher income and leave them less inheritance.
Of course, your tax circumstances could change as could theirs, which is why I’m not sure I would do conversions based on this reason alone unless I was highly confident about whose income taxes would look like when I died.
Wrap Up
Roth conversions can be an incredible tax planning tool if circumstances allow.
Keep in mind that even if one or more of the conditions on this list apply to you, you shouldn’t make Roth conversions a priority until you have enough cash available to do so.
Otherwise, you’ll enter this annoying tax cycle where you make a conversion, which triggers a tax, then pull a little more out to pay the tax, which triggers a tax, which requires you to pull a little more out, which triggers a tax, and so on.
It’s not the end of the world if the math makes sense, but in many cases, if you don’t have the cash conversions are really worth it.
For more about Roth Accounts, check out our Roth Playlist on the MartinMoney YouTube channel.
