Roth Conversions: When They Make Sense and When They Don't

Part of the Riverstone Tax Planning Series

If there's one tax planning strategy I get asked about more than any other, it's Roth conversions.

And I understand why. The concept is appealing: pay taxes now, never pay them again. Watch your money grow tax-free. Leave it to your heirs without a tax bill attached. On paper, it sounds like a straightforward win.

The reality is more nuanced. Roth conversions can be one of the most powerful tools in a retirement tax plan. They can also be a costly mistake if the timing is wrong or the math hasn't been run carefully. I've seen both outcomes working with clients throughout Morris County, Chester, and the broader New Jersey area, and the difference almost always comes down to one thing: context.

This article is about helping you understand that context.

What a Roth conversion actually is

A Roth conversion is the process of moving money from a traditional IRA into a Roth IRA. The amount you convert is added to your taxable income in the year of the conversion and taxed at ordinary income rates. In exchange, that money grows tax-free going forward, is never subject to Required Minimum Distributions, and can be withdrawn in retirement without owing a dollar in taxes.

The core question every Roth conversion analysis comes down to is this: are you better off paying taxes on this money now, or later?

That sounds simple. It isn't. The answer depends on your current tax bracket, your expected future income, how long the money has to grow, and a handful of other factors that interact in ways that aren't always obvious. Getting it right requires running actual numbers, not just general intuition.

When a Roth conversion tends to make sense

There are specific situations where conversions are most likely to generate real long-term value. Here's how I think about them:

The gap years before RMDs and Social Security begin. For clients who retire in their early to mid-60s, there's often a window where income drops significantly before Social Security kicks in and before Required Minimum Distributions begin at 73. That window can be genuinely valuable. If your taxable income is temporarily lower than it will be in the future, converting a portion of your traditional IRA at today's rate may be worth the tax bill you pay now.

When your balance has dropped. A market downturn is uncomfortable. It can also create a planning opportunity. If your IRA has declined in value, you're converting fewer dollars to generate the same number of Roth shares. You pay tax on the lower value, the account recovers inside the Roth, and that recovery happens tax-free. Clients who did conversions during the 2022 market decline came out well on that tradeoff.

When future tax rates are likely to be higher. Current federal tax rates are historically moderate, and the Tax Cuts and Jobs Act provisions that created them are scheduled to sunset after 2025. Nobody knows exactly what rates will look like in five or ten years, but if you have reason to believe your tax rate will be meaningfully higher in the future, locking in today's rate has real logic behind it.

When you want to reduce future RMDs. Every dollar you convert out of a traditional IRA is a dollar that won't be subject to mandatory distributions later. For clients with large IRA balances who are concerned about the RMD problem I described in the prior article in this series, gradual conversions over several years can take a meaningful bite out of those future obligations.

When you're thinking about your heirs. Roth IRAs pass to beneficiaries income-tax-free. Under current rules, most non-spouse beneficiaries must distribute inherited IRAs within ten years. If that inherited money sits in a traditional IRA, those distributions are taxable. If it's in a Roth, they aren't. For clients focused on wealth transfer, that distinction matters considerably.

When a Roth conversion doesn't make sense

This is where I push back on clients who come in convinced they should convert everything immediately.

If the conversion pushes you into a significantly higher bracket. This is the most common mistake I see. The math on a Roth conversion changes dramatically depending on what marginal rate you're paying on the converted dollars. Converting $100,000 at a 22% rate is a very different calculation than converting that same $100,000 and having part of it taxed at 32%. Partial conversions, sized carefully to stay within a specific bracket, are almost always more effective than large lump-sum conversions.

If it triggers IRMAA. As I covered in the prior article, Medicare premiums are income-sensitive. A large Roth conversion in one year can push your income above an IRMAA threshold and result in significantly higher Medicare premiums two years later. This is a real cost that often gets overlooked in conversion planning and can erode a meaningful portion of the projected benefit.

If you don't have cash outside the IRA to pay the tax. Paying the conversion tax from the IRA itself is generally a poor outcome. You're depleting the account you're trying to grow, and you lose the compounding benefit on those dollars. Conversions work best when you have funds in a taxable account to cover the resulting tax bill.

If your time horizon is short. A Roth conversion is a long-term play. You're paying taxes now to avoid them later, which means you need enough time for that tradeoff to work in your favor. For clients in their late 70s or 80s with a shorter planning horizon, the math often doesn't support the conversion.

If your future income is likely to be lower, not higher. Not everyone ends up in a higher bracket in retirement. If your spending will drop significantly, your Social Security is modest, and your RMDs won't be outsized, it's entirely possible that your future tax rate will be lower than your current one. In that case, paying taxes now at a higher rate defeats the purpose.

Partial conversions and the multi-year approach

One of the most important concepts in Roth conversion planning is that it rarely needs to be an all-or-nothing decision.

Most of the clients I work with on this strategy convert gradually over a period of years, converting an amount each year that fills up a specific tax bracket without spilling into the next one. This approach keeps the tax cost manageable, avoids IRMAA spikes, and builds up Roth balances steadily over time.

The planning window for this matters. Clients who start thinking about conversions at 58 or 60 have a decade or more to work with before RMDs begin. That gives them significant flexibility. Clients who come to me at 72 asking about conversions still have options, but the window is narrower and the tradeoffs are tighter.

How this fits into the bigger picture

Roth conversions don't exist in isolation. The most effective conversion strategies I've built for clients here in northern New Jersey are coordinated with Social Security timing decisions, RMD projections, charitable giving strategies, and the overall income picture across a 20 or 30 year retirement.

A conversion that looks smart when evaluated on its own can look very different when you account for how it interacts with everything else. That's why I'd encourage anyone seriously considering a Roth conversion to work through the full analysis before acting, not just the conversion math in isolation.

Working with a financial advisor in Morris County on Roth conversions

For individuals and families in Chester, Morris County, and across northern New Jersey, Roth conversion planning is one of the most common conversations I have with clients in their late 50s and early 60s. The decision is rarely simple, and the stakes are real. A well-timed conversion strategy can meaningfully improve long-term tax efficiency. A poorly timed one can cost more than it saves.

If you're curious whether a conversion makes sense for your situation, I'm happy to run the numbers with you. That conversation doesn't cost anything and often produces a clearer picture of what's actually worth doing.

Riverstone Wealth Planners is located at Chester Woods Professional Park, 385 Route 24, Suite 3E, Chester, NJ 07930. We work with clients throughout Morris County, the NJ/NY metro area, and nationwide through a fully virtual planning experience. 

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Frequently Asked Questions

Are Roth conversions always a good idea? No, and anyone who tells you they are is not giving you complete advice. Whether a conversion makes sense depends on your current tax rate, your expected future income, your Medicare situation, and how long the money has to grow. The analysis is specific to each client's circumstances.

Do you pay taxes on a Roth conversion? Yes. The amount converted is added to your taxable income in the year of the conversion and taxed at ordinary income rates. This is why sizing the conversion carefully to manage your bracket is so important.

Can Roth conversions reduce future taxes? Yes, in the right situations. By shifting money from a taxable traditional IRA to a tax-free Roth account, you reduce the balance subject to future Required Minimum Distributions and eliminate taxes on future growth and withdrawals. The benefit is most significant for clients with long time horizons and meaningful future income expectations.

What is the biggest mistake people make with Roth conversions? Converting too much in a single year without accounting for the bracket impact and Medicare premium consequences. A well-planned partial conversion strategy spread over several years is almost always more effective than a large lump-sum conversion.

Where can I find a financial advisor in Morris County NJ to help with Roth conversion planning? Riverstone Wealth Planners, based in Chester, New Jersey, works with individuals and families throughout Morris County and the broader NJ/NY area on retirement tax planning, including Roth conversion analysis. You can schedule a call directly at the link above.
 

Riverstone Wealth Planners Chester, New Jersey | Serving Morris County and the NJ/NY Metro Area 

This material is for informational purposes only and should not be considered individualized financial, tax, or legal advice. Individuals should consult with a qualified financial professional, tax advisor, or attorney regarding their specific situation. Advisory services are offered through Riverstone Wealth Planners. Securities and advisory services may be offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The strategies discussed, including Roth conversions, may not be appropriate for all individuals. Tax laws are subject to change, and the impact of these strategies will vary based on individual circumstances.

A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting. To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions. This material is for informational purposes only and does not constitute tax, legal, or investment advice. Please consult a qualified tax professional regarding your individual circumstances.