A Roth IRA conversion is available any time you have money in a qualifying pre-tax account. People choose to make a conversion to reduce future required minimum distributions (RMDs), spread taxes over several years and create a source of tax-free retirement income. But the success of this strategy will depend on your timing. Earlier conversions give the funds more time to grow and may occur in lower-tax years, while later conversions can create larger tax bills and leave less time for the benefits to build. To help you determine whether this strategy is a good fit for your retirement, let’s walk through an example of a 65-year-old who is considering whether to convert $950,000 from an IRA.
If you are considering a Roth IRA conversion, a financial advisor can run projections to show how this strategy may affect your long-term finances.
What Is a Roth Conversion?
A Roth IRA is known as a post-tax portfolio. This means contributions are made with money that you have already paid taxes on. You don’t get deductions or other tax breaks for a Roth contribution, but you pay no taxes on qualifying withdrawals, including both contributions and investment gains.
Roth withdrawals also do not count toward taxable income, which can reduce Medicare premiums and the taxation of Social Security benefits. Because the funds are already taxed, a Roth IRA does not require minimum withdrawals during your lifetime.
A Roth conversion is when you move money or assets from a qualifying pre-tax retirement account, such as a traditional IRA or a 401(k), into a Roth IRA. Unlike Roth contributions, which are subject to annual IRS limits, there is no cap on how much you can convert. You can convert any amount, at any time, as long as the assets come from a qualifying pre-tax account.
Once the money is in the Roth IRA, it follows the Roth rules. Growth is untaxed from that point forward, and qualified withdrawals in retirement are free from federal income tax. That is the main benefit of converting.
When you convert pre-tax savings to a Roth IRA, the converted amount becomes taxable in the year of the transfer. This added income can increase your federal tax bill, move you into a higher tax bracket and affect other calculations tied to your adjusted gross income, including Medicare premiums and the taxation of Social Security benefits.
A large, one-time conversion can create a significant upfront cost, which is why some investors choose to convert smaller portions over multiple years to manage the tax impact.
What Are Conversion Taxes?
When you convert money to a Roth IRA you will use money on which you have not paid taxes yet. So you must pay income tax on the entire amount that you transfer over. This includes both your account’s principal and its returns. This is known as the conversion tax.
In practice, this means increasing your taxable income for the year by the amount converted. For example, say that you make $75,000 per year, paying $8,341 in federal income taxes at an 11.12% effective tax rate. This year, you convert your $950,000 IRA to a Roth portfolio. Your taxable income for the year would be $1,025,000 ($75,000 income + $950,000 conversion).
Using the 2026 brackets, the federal tax on $1,025,000 is calculated as follows:
- 10% on $12,400 = $1,240
- 12% on $38,000 = $4,560
- 22% on $55,300 = $12,166
- 24% on $96,075 = $23,058
- 32% on $54,450 = $17,424
- 35% on $384,375 = $134,531
- 37% on $384,400 = $142,228
Total tax = $335,207
Additional tax from conversion = $335,207 – $8,341 = $326,866
Effective tax rate = $335,207 ÷ $1,025,000 = 32.71%
If you are older than 59 1/2, you can take the money for conversion taxes from your retirement portfolio itself. This means that you don’t need the cash on hand, but it also reduces the value of your portfolio.
If you are younger than that, or if you don’t want to take the money from your portfolio, you need to take the cash from other sources. This has the advantage of leaving your portfolio intact, but it means taking investible capital you could use elsewhere.
As an example, let’s assume that your IRA generates an 8% mixed-asset average rate of return. If left alone from age 65 to age 73 (when RMDs currently kick in), your $950,000 IRA could grow to around $1.76 million.
To calculate the future value:
- The account starts with a balance of $950,000 at age 65.
- An 8% annual return is expressed as a growth factor of 1.08 (the original balance plus 8%).
- Growth compounds, so the 1.08 factor is applied once for each year the money remains invested.
- From age 65 to 73 is eight years, so the calculation uses 1.08⁸ to reflect eight consecutive years of compounding.
- 1.08⁸ = 1.85093, which is the total growth factor over that period.
- Multiplying the starting balance by this factor gives the projected value: $950,000 × 1.85093 = $1,758,383.
Rounded, this is the basis for the estimate that the IRA could reach about $1.76 million.
With a 4% annual rate of withdrawal starting at age 73, that could generate about $70,335 per year in after-tax income.
To calculate this amount:
- Rounded, this produces an annual withdrawal of about $70,335.
- The projected account balance at age 73 is $1,758,383.
- A 4% withdrawal rate is written as 0.04.
- Multiply the balance by the withdrawal rate: $1,758,383 × 0.04 = $70,335.32.
If you convert that portfolio and draw on its money to pay the conversion taxes, you would have a $623,134 Roth IRA.
To calculate the post-conversion balance:
- Start with the $950,000 IRA.
- The additional federal tax triggered by the conversion is $326,866.
- Paying this tax from the portfolio leaves: $950,000 − $326,866 = $623,134.
Over the same period, at the same 8% rate of return, that Roth IRA could grow to about $1.15 million.
To calculate the future value of the Roth:
- The account begins with $623,134 after taxes are paid.
- Eight years of 8% compound growth is expressed as 1.08⁸ = 1.85093.
- Multiplying the starting balance by this growth factor gives: $623,134 × 1.85093 = $1,153,378.
At a 4% withdrawal rate, that could generate about $46,135 per year in after-tax income.
To calculate the withdrawal amount:
- Take 4% of the projected Roth balance at age 73: 0.04 × $1,153,378 = $46,135.
Staggered conversions are a common way to reduce the tax impact of moving money into a Roth IRA. Instead of converting a large balance in one year, you convert smaller amounts over multiple years. This spreads the added income across several tax returns and reduces how much of each conversion falls into higher tax brackets.
However, staggered conversions add complexity to your planning. Your account balance will change each year due to market growth, withdrawals or both, which can affect your tax brackets and the timing of future conversions. And, if you are already taking required minimum distributions (RMDs), these must be taken first and cannot be converted, which may further influence how much you can convert in any given year.
Should You Convert Your IRA?
To explain how this works, let’s assume that you want to convert a $950,000 IRA as part of your retirement plan. Your decision will depend on a few factors:
- When do you plan on retiring?
- What is your current income and tax rate?
- What will your retirement income and tax rate be?
- What are your goals?
- When, if ever, will you withdraw this money?
For this example, let’s start with your goals for the IRA. If your priority is to avoid RMDs and maximize the inheritance value of this portfolio for estate planning purposes, then a Roth conversion may be the right move. A Roth IRA is exempt from RMDs, so the money can continue growing and remain available for heirs. However, if you need this money for your own retirement spending, the analysis becomes more complicated.
Assuming that you are age 65 in 2026, your RMDs would likely begin at 75 (as of 2033). Converting the account in $150,000-per-year installments (about a 16% annual conversion) could allow you to complete the conversion before RMDs begin, depending on investment returns. But each conversion increases your taxable income for the year, and the resulting tax cost can be substantial.
This is where the trade-off becomes clear. Converting the IRA now means paying large taxes up front, which reduces the balance that continues to grow. Leaving the funds in the traditional IRA means paying taxes later as you withdraw the money. The central question is which approach leaves you with more after-tax income over the course of retirement.
In most cases, at this stage of life you will lose money by paying the accelerated taxes of a Roth conversion. If you earn $75,000 per year and add a $150,000 conversion, your taxable income would rise to $225,000. The additional tax on that $150,000 would be $37,244, on top of the $11,212 you already owe on your base income. Depending on how long it takes to complete the conversions, you could pay between $250,000 and $375,000 in total conversion taxes.
Because you will need this portfolio for income soon, the account will have little time to grow tax-free and offset these up-front costs.
Steps for this calculation (using 2026 single-filer brackets):
Tax on $75,000 of income:
- 10% on $12,400 = $1,240
- 12% on $38,000 = $4,560
- 22% on $24,600 = $5,412
- Total = $11,212
Tax on $225,000 of income:
- 10% on $12,400 = $1,240
- 12% on $38,000 = $4,560
- 22% on $55,300 = $12,166
- 24% on $96,075 = $23,058
- 32% on $23,225 = $7,432
- Total = $48,456
Annual conversion tax:
- $48,456 − $11,212 = $37,244
Bottom Line
At age 65, a Roth conversion may make sense if your goals center on estate planning or avoiding future RMDs, since moving the money into a Roth can give it more room to grow without mandatory withdrawals later. But if you expect to draw from this account in the near future, the up-front taxes required for a conversion can outweigh the potential benefits. With less time for the account to grow, it becomes harder to recover those costs, which can leave you with a smaller balance for retirement spending.
Retirement Planning Tips
- A financial advisor can help you determine when is the best time retire and manage other factors to maximize your benefits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your nest egg could grow over time, SmartAsset’s retirement calculator could help you get an estimate.
Photo credit: ©iStock.com/Maks_Lab, ©iStock.com/ArLawKa AungTun, ©iStock.com/Jacob Wackerhausen
Read the full article here
