Is Now the Time for a Roth IRA Conversion? What to Know Before You Make the Move

With markets fluctuating and whispers of higher tax rates on the horizon, many investors are asking the same question: Is now a good time to convert to a Roth IRA?

The answer, like many things in financial planning, depends on your unique situation.  But here’s what you need to know before making the switch.

Roth IRA Conversion Benefits in a Potentially Rising Tax Environment

When you convert funds from a traditional IRA to a Roth IRA, you pay income tax on the amount converted in the year of the conversion.  However, once the money is in the Roth, it grows tax-free and can be withdrawn tax-free in the future (as long as you meet the age and holding requirements). That kind of tax-free growth and withdrawal flexibility becomes incredibly valuable if:

• You believe your tax rate will be the same or higher later in life,
• You're taking advantage of temporarily lower tax brackets,
• Or you're simply aiming for more control over your taxable income later in life.  I can almost assure you that there will be a year when you will jump into a higher tax bracket because you’ll need a larger withdraw to pay for a long-term care event or buy a new car.  And if married, you’ll be hit with what is called the “widow’s penalty” as you will go from being taxed jointly with wider income thresholds to being taxed as a single person.

It’s also a hedge against rising tax rates. The lower rates enacted back in 2017 are scheduled to sunset after 2025. If you think taxes are likely to rise (say, to cover our growing federal deficit), converting at today’s rates might be smart long-term planning.

Things to Be Aware Of

1. Roth IRA Conversion Strategy: Don’t Use IRA Funds to Pay the Taxes (if possible)

If you convert $100,000 from your traditional IRA, you’ll owe tax on that amount. But resist the urge to pay the tax using money from the same IRA. Doing so not only reduces the amount going into the Roth but may also trigger early withdrawal penalties if you’re under the age of 59½. Ideally, use non-IRA funds to cover the tax bill.

2. Partial Roth Conversions Help Manage Income and Tax Brackets

Conversions can be done in chunks over multiple years, allowing you to spread the tax liability and stay in a lower tax bracket. This is a strategy I often employ for those that have just retired and are in their 60s as they juggle filing for social security and need to balance what account to pull money from to provide for their living expenses.

3. Inherited Roth IRA Rules: What Still Applies After a Conversion

A Roth conversion won’t eliminate the 10-year rule for inherited IRAs. However, inherited Roth IRAs can be withdrawn tax-free, unlike traditional ones. That’s an important benefit for your heirs, especially if they are in a higher tax bracket or in their prime earning years.

4. Roth IRA Conversions Can Trigger Higher Medicare Premiums

If you're on Medicare or close to enrolling, remember that Roth conversions will raise your Modified Adjusted Gross Income (MAGI), potentially triggering higher Part B and Part D premiums. For 2025, those surcharges apply if your 2023 income exceeded $212,000 (married) or $106,000 (single).

5. RMD Rules and Roth Conversions: What You Must Do First

If you’re already subject to Required Minimum Distributions (RMDs), you’ll need to take your full RMD before doing a Roth conversion. RMD amounts themselves cannot be converted to a Roth IRA.

When Roth IRA Conversions Make the Most Sense

If your IRA assets have taken a dip with the market, converting while account values are temporarily depressed can be especially appealing. You’ll pay tax on a lower dollar amount today, and any market rebound happens inside the Roth where growth is tax-free.

The same logic applies if your income is down temporarily or if you’ve got a window between retirement and when Social Security or RMDs kick in. Converting during these lower-income years is a savvy move to provide tax flexibility and potentially lower your lifetime tax bill.

Final Thoughts on Roth IRA Conversions in 2025

A Roth conversion is a powerful planning tool, but it’s not one-size-fits-all. It requires careful consideration of your current income, future tax projections, and overall retirement strategy. Done right, it can reduce your lifetime tax bill and increase the after-tax value of your retirement assets.

If you're wondering whether a Roth conversion fits into your long-term plan, let's talk. I'm here to help you think it through, evaluate your options, and map out the smartest way forward.