Roth Conversion: When Moving from a Traditional IRA to a Roth IRA Makes Sense

Key Takeaways

A roth conversion means moving money from a tax-deferred retirement account, such as a traditional ira, simple ira, sep ira, 401(k), 403(b), or thrift savings plan, into a roth ira. You pay taxes now on previously untaxed dollars in exchange for the possibility of tax free growth and tax free withdrawals later.

• During 2024–2025, many provisions of the 2017 Tax Cuts and Jobs Act were scheduled to sunset after 2025, which made Roth planning urgent for many pre-retirees. As of 2026, Congress has changed parts of that outlook, but future tax rates remain a real planning risk.

• A Roth conversion allows individuals to pay taxes on their retirement savings now, potentially saving money in taxes later if they expect to be in a higher tax bracket during retirement.

• Roth IRAs do not have required minimum distributions (RMDs) during the account owner’s lifetime, allowing the funds to grow tax-free for a longer period compared to traditional IRAs.

• A conversion can reduce future required minimum distributions, create tax free retirement income, and support estate planning for heirs, especially for high-income households and business owners in Bentonville, Arkansas.

• The amount converted is taxed as ordinary income, which can increase taxable income, create a larger tax bill, trigger Medicare premium surcharges, affect ACA subsidies, and push you into a higher tax bracket.

• Revolutionary Wealth can build a multi-year roth ira conversion strategy around your retirement plan, business exit timing, cash flow, and tax payment strategy.

What Is a Roth Conversion?

A roth conversion is the process of moving tax deferred funds from a tax deferred account into a roth ira. In plain English, you are moving an ira to a roth and choosing to pay income tax now on dollars that have not yet been taxed.

This can include money from:

• a traditional ira

• a sep ira

• a simple ira, if specific criteria are met

• a 401(k), 403(b), thrift savings plan, or another employer sponsored retirement plan

• certain other retirement plans or a workplace retirement plan after separation from service

Anyone with a traditional IRA can convert to a Roth IRA, regardless of their income level, and this includes funds from 401(k), 403(b), SEP, or SIMPLE IRAs if specific criteria are met. That is different from roth ira contributions, which are limited by income limits, contribution limits, and an annual limit.

Traditional accounts usually receive tax deductible contributions or pretax dollars, grow tax deferred, and create taxable ira distributions later. A roth ira is funded with after tax dollars through roth contributions or conversions, and qualified distributions may be withdrawn tax free after age 59½ and after the 5-year rule is satisfied.

The most common use cases include pre-retirees in lower tax years, new retirees before RMD age, business owners after a sale, and widows or widowers planning for future single-filer tax rates.

Roth IRA vs. Traditional IRA: Why Conversions Matter

For someone age 59–67 approaching retirement, the traditional ira and the roth ira play very different roles in a retirement plan. One gives you tax deferral now; the other can give you tax exempt income later.

Here is the simple comparison:

For high-net-worth families and business owners, the question is rarely “pay tax or avoid tax forever.” The better question is: which marginal tax bracket should absorb the income, and which generation should owe income tax?

How to Convert an IRA to a Roth IRA

There are several IRS-approved ways to convert money into a roth ira. The mechanics may be simple, but the tax implications and reporting need care.

Common methods include:

• Trustee-to-trustee transfer: The cleanest route is usually a direct move from one financial institution to another, or a same trustee transfer from a traditional ira to a roth ira.

• In-plan Roth conversion: Some 401(k), 403(b), simple ira plan, or other employer plan documents allow in plan conversions into a roth account inside the plan.

• 60-day rollover: You receive the money and then deposit it into a Roth IRA within 60 days. This is riskier because missing the deadline can create taxes and penalties.

Conversions can be full or partial. Most Revolutionary Wealth clients do not convert an entire account at once. Instead, we often convert money gradually to stay within a target tax bracket.

A simple ira generally must satisfy the two-year rule before conversion to avoid additional penalties. A sep ira follows rules similar to a traditional ira.

Your custodian will issue Form 1099-R, and you generally report the conversion on IRS Form 8606. Common mistakes include failing to report basis, misunderstanding the pro-rata rule, and assuming the custodian’s paperwork automatically calculates your final tax bill.

Tax Implications: Brackets, Conversion Taxes, and Timing

Every dollar converted from a traditional or SIMPLE IRA to a Roth IRA is added to your taxable income in the year of conversion. When converting a traditional IRA to a Roth IRA, the amount converted is added to your taxable income for the year, which may push you into a higher tax bracket.

You will owe taxes on any money in the traditional IRA that would have been taxed when you withdrew it if you convert to a Roth IRA, including tax-deductible contributions and tax-deferred earnings. In other words, pretax contributions plus earnings are taxed as ordinary income at federal rates and, where applicable, state rates.

For example, a married couple near the top of the 24% federal bracket may choose to convert only enough to stay inside that bracket instead of spilling into the 32% bracket. If you convert a large amount to a Roth IRA in one year, it could significantly increase your taxable income, leading to a higher marginal tax rate and a larger tax bill.

Other items to watch:

• Medicare IRMAA surcharges, which are based on income from two years earlier

• Net Investment Income Tax exposure when modified adjusted gross income crosses certain thresholds

• ACA premium subsidies

• deductions or credits that phase out when income exceeds certain limits

• Arkansas state income tax for Bentonville residents and other state taxes for clients nationwide

Low-income years can be ideal. It’s advisable to consider converting a portion of your traditional IRA to a Roth IRA in years when your income is lower to minimize the tax impact of the conversion. These windows often occur after retirement but before Social Security, pensions, or required minimum distributions begin.

Roth Conversion Rules You Can’t Ignore

Roth conversion rules are strict, and conversions are permanent under current law. The federal government eliminated recharacterizations for Roth conversions after January 1, 2018, so there is no easy “undo” button if the conversion creates more income tax than expected.

The five-year rule matters. There is a five-year rule for Roth conversions, meaning that converted funds must remain in the Roth IRA for at least five years before they can be withdrawn without penalties, unless the account holder is over age 59½.

The five-year rule applies to converted amounts in a Roth IRA, meaning you must wait five years before withdrawing converted funds without penalties, which can affect the timing of your conversion. Each conversion has its own five-year clock, beginning January 1 of the conversion year.

If you are already over age 59½, the 10% early withdrawal penalty generally does not apply to converted principal. However, if your roth ira is brand new, the five-year rule can still affect whether earnings are qualified and withdrawn tax free.

One more rule: if you are subject to required minimum distributions, you must take the RMD first. RMD amounts themselves cannot be converted, but additional non-RMD dollars may be eligible.

Backdoor Roth and Other Advanced Roth Strategies

Regular roth ira contributions are limited for high earners, but there are other ways to get money into a roth account. This is where the backdoor roth ira and related strategies can help.

The backdoor Roth IRA conversion process involves making a contribution to a traditional IRA and then converting those funds to a Roth IRA, which allows high earners to bypass income limits for Roth contributions.

However, the pro-rata rule can make this more complicated. If you have other traditional ira assets with pretax dollars, the IRS generally looks at all IRA balances together when determining how much of the conversion is taxable.

Other advanced strategies include:

• Mega backdoor Roth: Some employer plans allow large after tax contributions and in-plan Roth conversions.

• In plan conversions: Certain plans allow pretax dollars to move into a roth account without leaving the plan.

• Coordinated business-owner planning: A business owner may combine a retirement plan, cash balance plan, brokerage account, and conversion strategy around a sale or stock vesting event.

Revolutionary Wealth often coordinates these decisions with CPA partners so clients do not discover unexpected conversion taxes after the transaction is complete, drawing on insights from their retirement and wealth planning resource center.

Roth Conversions and Required Minimum Distributions (RMDs)

Required minimum distributions are mandatory ira withdrawal amounts from most tax-deferred retirement accounts. For many current retirees, RMDs begin at age 73 and are calculated using IRS life expectancy tables.

Roth IRAs owned by the original account owner are not subject to lifetime RMDs. That means money can stay invested longer, and roth ira growth may continue without forced taxable distributions.

Converting before RMD age can shrink future traditional ira balances. That may reduce future required minimum distributions, lower future taxable income, and help manage Medicare premiums.

SEP and SIMPLE IRA owners must still take RMDs from those accounts when required. Those minimum distributions cannot be converted, but amounts above the RMD may still be converted.

For example, a late-60s client in Bentonville, Arkansas with significant tax deferred savings might use a 5–10 year conversion schedule. The goal would be to manage future RMD exposure, reduce the risk of higher Medicare premiums, and leave more flexible retirement funds for heirs.

Who Should Consider Converting to a Roth?

A roth conversion is most valuable for people within about 10 years of retirement or already retired with meaningful tax deferred balances. The best candidates are often those who can pay taxes now from a taxable account or cash without disrupting their lifestyle.

You may want to evaluate a roth ira conversion if you are:

• a pre-retiree expecting a higher tax bracket later because of pensions, Social Security, annuities, ira investments, and investment portfolio income

• a widow, widower, or divorced person who may face single-filer brackets later

• a business owner planning a sale, buyout, or liquidity event

• a supersaver with large retirement savings in tax deferred accounts

• an investor expecting future tax rates or state tax rates to rise

Converting to a Roth IRA can be strategically beneficial if you expect to be in a higher tax bracket in the future, allowing you to pay taxes now at a lower rate.

A conversion may not be ideal if you expect a much lower tax bracket later, rely on ACA subsidies, need deductions tied to income, or plan to leave most retirement accounts to charity through qualified charitable distributions.

The right analysis looks beyond this year’s tax bill. Revolutionary Wealth compares lifetime after-tax outcomes for you, your spouse, and your beneficiaries.

How to Pay the Taxes on a Roth Conversion

The most practical barrier is often not the paperwork. It is how to pay the taxes without derailing cash flow.

The preferred method is usually to pay conversion taxes from non-retirement assets, such as cash, a taxable account, or a brokerage account. That lets the full converted amount remain in the roth ira so the money grow tax free over time.

Paying taxes from the IRA itself has trade-offs. The amount withheld may be treated as a taxable distribution, can reduce the amount that reaches the Roth IRA, and may trigger a 10% penalty if you are under age 59½.

Here is a simplified example:

Multi-Year Roth Conversion Strategies with Revolutionary Wealth

Revolutionary Wealth typically does not recommend “all at once” conversions for large retirement accounts. Instead, we design staged, multi-year Roth conversion plans that fit your broader lifestyle and financial planning priorities.

One common method is “filling the bracket.” This means converting enough each year to use a target tax bracket without unnecessarily jumping into the next one. We also monitor Arkansas income tax, Medicare thresholds, capital gains, Social Security timing, and cash needs.

Multi-year planning may coordinate with:

• Social Security claiming

• pension start dates

• annuity income

• business sale or buyout schedules

• stock market declines, where depressed asset values may make conversion more attractive

• future charitable giving or estate taxes planning

As a Bentonville, Arkansas-based advisory firm serving clients nationally, Revolutionary Wealth models roth conversion scenarios using realistic portfolio returns, inflation assumptions, and possible tax law changes, and shares related education through their library of financial planning videos. Our team manages over $100 million directly and advises on over $500 million annually through broader planning relationships.

Consider a 62-year-old business owner with $2 million in tax deferred funds and a planned company sale in 2028. Instead of waiting until the sale year, we might model partial conversions before the liquidity event, avoid peak earning years, and preserve flexibility before RMDs begin.

Common Mistakes to Avoid When Converting to a Roth

The paperwork can look simple, but poor timing can create unnecessary conversion taxes and penalties.

Avoid these common errors:

• converting too much in one year and jumping several tax brackets

• ignoring Medicare IRMAA cliffs

• forgetting to take required minimum distributions before converting

• failing to factor in Arkansas or other state income tax

• assuming a backdoor roth conversion is tax free when pretax IRA dollars exist

• using a 60-day rollover instead of a direct trustee-to-trustee transfer

• converting during the same year as a business exit, large bonus, or major capital gains event without modeling the combined tax impact

The pro-rata rule is especially important. If after tax and pretax IRA dollars are mixed, a backdoor Roth may generate income tax even when the original contribution was nondeductible.

Coordinating Roth Conversions with Your Broader Retirement Plan

A roth conversion is only one lever in a broader retirement strategy. It should coordinate with cash flow, investment allocation, insurance, estate planning, and withdrawal sequencing.

Having both Roth and traditional balances creates tax diversification. In some years, you may withdraw money from traditional accounts. In other years, you may use Roth dollars, a taxable account, or cash to avoid pushing yourself into a higher tax bracket.

Business owners often need even more coordination. Roth planning may run alongside a defined benefit plan, cash balance plan, employer sponsored retirement plan decisions, succession planning, and the timing of a sale.

Revolutionary Wealth is not just a “roth conversion calculator.” We help clients connect tax advice, retirement income, estate planning, and business planning into one strategy designed around their personal financial situation.

FAQ: Roth Conversions and Your Retirement

Does a Roth conversion count toward my annual Roth IRA contribution limit?

No. A roth conversion is separate from roth ira contribution limits. Contribution limits apply to new money added to IRAs, while conversions move existing retirement funds from a tax deferred account to a roth ira.

You may be able to make roth ira contributions and convert additional money in the same year, depending on eligibility. High-income earners who cannot make direct Roth IRA contributions may still convert because Roth conversions do not have income limits.

Can I convert my SIMPLE IRA or SEP IRA to a Roth IRA?

Yes. A sep ira can generally be converted under the same rules as a traditional ira, and pretax converted amounts are taxed as ordinary income.

A simple ira can also be converted, but the account usually must satisfy the two-year rule to avoid additional penalties. Business owners using a SIMPLE or SEP plan in Bentonville, Arkansas should coordinate plan decisions with long-term Roth strategy.

How do Roth conversions affect my heirs and estate planning?

Converting to a Roth IRA can be beneficial for estate planning, as beneficiaries can inherit Roth IRAs tax-free, provided the account has been open for at least five years.

Under current SECURE Act rules, many non-spouse beneficiaries must empty an inherited Roth IRA within 10 years. But qualified withdrawals are generally federal income-tax-free, which may reduce the family’s total tax burden if heirs would otherwise be in equal or higher brackets.

Is a Roth conversion still worth it if tax laws change after 2026?

It can be. Many taxpayers originally evaluated Roth conversions because tax rates were expected to rise after the scheduled TCJA sunset. Current law has changed parts of that outlook, but future tax rates, deductions, thresholds, and estate rules can still change.

The value of a conversion is not based only on one year’s brackets. Roth conversions may provide tax free growth, reduce RMDs, and improve withdrawal flexibility under many plausible scenarios.

Can I roll over my 401(k) to a Roth IRA when I retire?

Generally, yes. When you leave an employer, you may be able to roll a traditional 401(k) into a traditional IRA, roll Roth 401(k) money into a Roth IRA, or convert traditional 401(k) dollars directly to a Roth IRA.

The converted amount is taxable, so many retirees use staggered conversions over several years. Before moving money, speak with Revolutionary Wealth so the sequence from workplace retirement plan to IRA to Roth IRA is designed to minimize lifetime taxes, not just simplify paperwork.

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