When a Roth conversion makes sense—and when it doesn’t

Roth individual retirement accounts (IRAs) remain one of the most powerful tools in retirement planning, but they are also among the most misunderstood. For many investors, Roth strategies—whether through direct contributions, Roth 401(k)s, backdoor Roth IRAs, or conversions—can play a crucial role in building long-term, tax-free wealth. At the same time, they require careful planning to avoid pitfalls.

Roth vs traditional IRAs

Before exploring Roth conversions, it is important to understand how Roth IRAs differ from traditional IRAs. Both Roth and traditional IRAs share the same structure: Money goes in during the contribution phase, grows during the accumulation phase, and eventually comes out during the distribution phase. The key difference is taxation. Traditional IRAs typically allow pretax contributions and provide a deduction in the year of contribution, but withdrawals in retirement are fully taxable as ordinary income. Roth IRAs are funded with after-tax dollars. There is no deduction up front, but both growth and withdrawals are tax-free if basic age and holding-period rules are met.

The choice between Roth and traditional accounts depends on expectations about future tax brackets. Paying taxes today through a Roth can be attractive if higher rates are expected later. Deferring taxes with a traditional IRA may be appealing if income will be lower in retirement. Even if tax rates remain the same, Roth IRAs provide added flexibility because they are not subject to required minimum distributions (RMDs) during the owner’s lifetime and allow tax-free withdrawals that can be managed strategically.

Contribution limits and options

Direct Roth IRA contributions are limited by income. In 2025, eligibility phases out for single filers above $165,000 and married couples filing jointly above $246,000. Contribution limits are $7000 per person younger than 50 years, and $8000 per person 50 years or older.

Investors above the income limits still have several pathways to Roth savings. Many employer retirement plans now include a Roth 401(k) option, which does not have income restrictions and allows higher annual contributions.

Another strategy is the “backdoor” Roth contribution. This involves making a nondeductible contribution to a traditional IRA and then converting that amount into a Roth IRA. Because the contribution is after-tax, the conversion is often minimally taxable. However, the pro-rata rule applies, which means all IRA balances must be aggregated to determine what portion of a conversion is taxable. You cannot pick and choose which dollars are converted; the Internal Revenue Service treats every IRA as 1 combined account. Savers with significant pretax IRA assets may face a higher tax bill unless they roll those balances into an employer plan like a 401(k) first.

Beyond these contribution methods, larger balances can be shifted into Roth accounts through Roth conversions. Unlike backdoor contributions, conversions are not limited by annual contribution caps, making them a way to move meaningful amounts of pretax assets into a tax-free account.

Strategic use of Roth conversions

A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion. Once inside the Roth, the funds grow and can be withdrawn tax-free.

Timing is crucial. Conversions are often most attractive in the years after retirement but before RMDs begin, currently between ages 73 and 75, when taxable income may be lower and tax brackets more favorable. They can also be beneficial during years of temporarily reduced income or during market downturns, when lower account values reduce the immediate tax cost of conversion.

Partial conversions are often the most effective. By spreading conversions over several years, investors can manage their taxable income and fill lower tax brackets without spilling into higher ones. Whenever possible, the taxes due on conversions should be paid from non-IRA funds. Using IRA assets to cover the tax bill reduces the amount that continues to grow in the Roth and, for those younger than 59½ years, may also trigger penalties.

Tax rules and withdrawal flexibility

Roth conversions are taxed as ordinary income in the year they occur. The conversions themselves are not subject to the 10% early withdrawal penalty, but using IRA funds to pay the taxes can trigger penalties if the account owner is younger than 59½ years.

Once money is in a Roth IRA, the withdrawal rules depend on whether the funds are contributions, conversions, or earnings. Contributions can always be withdrawn tax- and penalty-free. Converted amounts are also available without tax or penalty once the account owner reaches 59½ years. Earnings can be withdrawn tax-free if 2 conditions are met: the Roth has been open at least 5 years, and the account owner is at least 59½ years (or qualifies under other exceptions such as disability or death).

Legacy and RMD planning

Roth IRAs also provide important estate planning benefits. Unlike traditional IRAs, Roths are not subject to RMDs during the owner’s lifetime, allowing more control over retirement income and taxes. For heirs, Roth IRAs are particularly valuable. Nonspouse beneficiaries must withdraw the assets within 10 years, but those distributions are income tax-free. Spousal beneficiaries, by contrast, may treat an inherited Roth as their own, preserving its long-term tax-free growth potential. This makes Roth accounts an efficient vehicle for passing wealth to the next generation.

When a Roth conversion may not make sense

Despite the advantages, Roth conversions are not always the right move. They are less appealing for those who expect to be in a lower tax bracket during retirement, for individuals who do not have outside funds to pay the tax bill, or for those who will need to use the assets soon and therefore will not benefit from years of tax-free compounding.

Final thoughts

Roth IRAs and Roth conversions provide a unique opportunity to build a pool of tax-free income for retirement. They can reduce the impact of required minimum distributions, give greater flexibility in managing taxable income, and serve as an efficient vehicle for transferring wealth to heirs. However, they are not automatically the right fit for everyone. The upfront tax cost of a conversion, expectations about future tax rates, and the time horizon before funds are needed all play a critical role in whether these strategies deliver real value. Because the rules are complex and the benefits highly dependent on individual circumstances, it is important to speak with a qualified adviser before deciding which Roth strategies make sense for you.

This material is provided for informational purposes only and does not constitute individualized investment, tax, or legal advice. All investments involve risk, including potential loss of principal. The suitability of Roth IRA strategies depends on your specific tax and financial situation. Please consult your tax advisor or financial professional before making any decisions.

Investment advisory services offered through MEDIQUS Asset Advisors, Inc. Securities offered through Ausdal Financial Partners, Inc.Member FINRA/SIPC · 5187 Utica Ridge Rd · Davenport, IA 52807 · 563-326-2064 · MEDIQUS Asset Advisors and Ausdal Financial Partners, Inc. are independently owned and operated.

Effective June 21, 2005, newly issued Internal Revenue Service regulations require that certain types of written advice include a disclaimer. To the extent the preceding message contains written advice relating to a Federal tax issue, the written advice is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer, for the purposes of avoiding Federal tax penalties, and was not written to support the promotion or marketing of the transaction or matters discussed herein.

The information contained in this report is for informational purposes only. Any calculations have been made using techniques we consider reliable but are not guaranteed. Please contact your tax advisor to review this information and to consult with them regarding any questions you may have with respect to this communication.

MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.