Roth Conversions Explained: When They Save You Thousands

A Roth conversion lets you pay tax on retirement money in a year you pick, at a rate you can see today. Done well, it can save a family six figures over a lifetime. Done carelessly, it costs money you never had to spend.

This article covers what a Roth conversion is, when a Roth conversion makes sense, when to leave it alone, and the mistakes that make it expensive. It is education, not advice for your specific situation.

Traditional vs Roth: the only difference is when you pay tax

With a traditional IRA, regular 401(k), or 403(b), you get a deduction going in and the entire withdrawal is taxed as ordinary income. With a Roth, you put in money that has already been taxed, and after age 59 and a half, once the 5 year rule is satisfied, you pay nothing on the way out.

The instinct is that Roth is obviously better because of tax free growth. Take $10,000 of pre tax money in the 24% bracket that grows 8 times. Traditional or Roth, you end up with $60,800 either way if your rate is the same going in and coming out. The only thing that changes the answer is whether your rate is higher now or higher later.

What is a Roth conversion?

A Roth conversion moves money from the traditional bucket into the Roth bucket. You pay ordinary income tax on that amount this year, and from then on it grows and comes out tax free. Two features make it powerful:

• No limits. Conversions have no income limit and no dollar limit.
• You choose the year. A conversion lets you deliberately move taxable income into your lowest tax years.

Why a Roth conversion helps beyond the tax rate

• Required minimum distributions. Once you turn 73, you are forced to withdraw from the traditional bucket, and every dollar is taxable. Every dollar converted beforehand shrinks that number.
• No required distributions on a Roth IRA. During your lifetime you never have to touch it.
• A surviving spouse. The survivor eventually files as a single taxpayer, with brackets roughly half as wide, while household income often stays close to the same.
• Your kids. Current rules generally require a child to empty an inherited traditional IRA within 10 years, with every withdrawal taxable. An inherited Roth comes out tax free.

Roth conversion example with real numbers

Tom and Susan are both 64 and recently retired. They have $1.2 million in a traditional IRA and are delaying Social Security until 70. Their only income is about $40,000 a year from a small pension and interest.

The 2026 standard deduction for a married couple is $32,200, which leaves $7,800 of taxable income. The 12% bracket runs up to $100,800, so they have $93,000 of unused room every year. Converting $93,000 costs $10,820 of federal tax, an effective rate of about 11.5%.

If they do nothing, at a 6% return the IRA grows to roughly $2 million by age 73. With required withdrawals, Social Security, and the pension, they are firmly in the 22% bracket. The same $93,000 would cost $20,460 later, so converting saves about $9,600 in one year, and they have 9 of these years.

When a Roth conversion makes sense, and when it does not

The classic window is what I call the gap years, after the paychecks stop but before Social Security and required distributions start, roughly 62 to 73 for a lot of people. Other windows include a job loss, a year your business ran a loss, a very large deduction, or a market drawdown.

It is not for everyone. I would leave it alone if:

• You are in your peak earning years and today is the highest rate you will ever pay.
• You are about to move from a high tax state to a state with no income tax.
• You plan to give the money to charity anyway.
• You are under 59 and a half and will need that specific money within 5 years.
• The only way to pay the tax is out of the IRA itself.

Roth conversion mistakes to avoid

1. Paying the tax with IRA money. The extra withdrawal is also taxable, and under 59 and a half it takes a 10% penalty on top.
2. Ignoring the pro rata rule. The IRS treats every traditional, SEP, and SIMPLE IRA you own as one pot and taxes the conversion proportionally.
3. Forgetting Medicare. Premiums are set by your income from 2 years earlier.
4. Assuming you can undo it. Before 2018 you could reverse a conversion. That option was eliminated.
5. Forgetting to pay the tax during the year. Nothing is withheld automatically, so make an estimated payment.

The way to avoid all five is to treat a conversion as a dial you turn a little every year, sized to the bracket you are trying to fill.

Common questions

Is there an income limit for a Roth conversion?

No. Conversions have no income limit and no dollar limit.

Can you undo a Roth conversion?

No. Once you convert, it is permanent, which is why you size it deliberately.

How should you pay the tax on a Roth conversion?

From money outside the IRA. Paying with IRA money creates more taxable income and shrinks the balance you were trying to grow.

VDB Wealth is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Pull up your 401k balance right now. Whatever that number says, it is not actually your money. Some portion of it belongs to the IRS. And here is the uncomfortable part. You do not know what that portion is, because you do not get to set the rate. Congress sets it, decades from now, when you are seventy five years old and have almost no control left.

A Roth conversion is one of the very few tools that flips that around. It lets you pay the tax on your terms, in a year you pick, at a rate you can see today. Done well, it saves a family six figures over a lifetime. Done carelessly, it costs you money you never had to spend, and there is no undo button.

So today I am going to start at the very beginning. What a traditional account and a Roth account actually are, and the real tax difference between them. Then why that difference matters more than most people think. Then what a conversion is, when it makes sense, and when you should leave it completely alone. Stay with me, because the piece almost everybody gets wrong shows up in the first five minutes.

About me and the roadmap

Quick introduction if we have not met. I am Andy, founder of VDB Wealth. Before I started the firm I traded for Deutsche Bank and helped manage a billion dollar portfolio for a single family, and today I work with individuals and families on the tax and planning side of building long term wealth.

Here is the roadmap. First, the two buckets, traditional and Roth, and the real tax difference between them. Second, the piece of math that explains why a conversion works at all. Third, what a conversion is and why it helps. Fourth, a real example with real numbers. And last, the mistakes that turn a smart move into an expensive one.

One note before we start. This is education, not advice for your specific situation. Your numbers are your own.

The two buckets: traditional vs Roth

Let us start with the foundation, because everything else builds on this.

Retirement money lives in one of two buckets. The difference between them is not what the money is invested in. You can own the exact same fund in both. The only difference is when you pay tax.

Bucket one is the traditional bucket. That is your traditional IRA, your regular 401k, your 403b. When you put a dollar in, you get a deduction, so that dollar never got taxed. It grows for thirty years without being taxed. And then when you take it out in retirement, the entire withdrawal is taxed as ordinary income. Not capital gains rates. Ordinary income, the same rates as a paycheck.

Bucket two is the Roth bucket. Roth IRA, Roth 401k. You put in a dollar that has already been taxed, so no deduction. It grows. And when you take it out in retirement, after age fifty nine and a half and once the five year rule is satisfied, you pay nothing. Nothing on the contribution, and nothing on thirty years of growth.

Here is the cleanest way to hold that in your head. It is a farmer deciding whether to pay tax on the seed or pay tax on the harvest.

Traditional is paying tax on the harvest. The seed goes in free, and the government takes a cut of whatever it grows into.

Roth is paying tax on the seed. You pay a small amount up front, and the entire harvest is yours.

And your instinct right now is probably that Roth is obviously better, because the harvest is so much bigger than the seed. That instinct is wrong. Understanding exactly why is the whole game.

The math almost nobody explains

Here is the part that almost never gets explained properly.

If your tax rate is the same when the money goes in and when it comes out, traditional and Roth produce the exact same result. Not close. Identical.

Let me show you. Say you have ten thousand dollars of pre tax money, you are in the twenty four percent bracket, and it grows eight times over your career.

Put it in the traditional bucket. Ten thousand dollars goes in with no tax taken. It grows eight times, to eighty thousand dollars. You retire, you are still in the twenty four percent bracket, and you withdraw it. Twenty four percent of eighty thousand dollars is nineteen thousand two hundred dollars of tax. You keep sixty thousand eight hundred dollars.

Now the Roth. Same ten thousand dollars, but you pay the twenty four percent tax first. That leaves seven thousand six hundred dollars actually going in. It grows the same eight times, to sixty thousand eight hundred dollars. And you owe nothing on the way out.

Sixty thousand eight hundred dollars either way. To the dollar.

The math does not care whether you pay the tax before the growth or after it. Multiplication does not care about order. Which means the tax free growth language you hear in Roth marketing is not actually the reason a Roth wins.

Here is the reason. The only thing that changes the answer is whether your rate is different at those two moments. Contribute at thirty seven percent and withdraw at twenty two percent, traditional wins. Contribute at twelve percent and withdraw at twenty four percent, Roth wins.

That is it. The entire traditional versus Roth debate collapses into one question. Is your rate higher now, or higher later?

And that one question is the entire reason Roth conversions exist.

What a Roth conversion actually is

So now the conversion.

A Roth conversion is simply moving money from the traditional bucket into the Roth bucket. You take pre tax money, you volunteer to pay ordinary income tax on it this year, and from that moment forward it lives on the Roth side. It grows tax free and it comes out tax free.

Nothing leaves your control. Nothing gets spent. You are only changing which tax treatment applies to it.

Two features make this genuinely powerful.

First, there are no limits. Roth contributions phase out once your income gets high enough, and they are capped at a few thousand dollars a year anyway. Conversions have no income limit and no dollar limit. Anyone can do it, at any income, for any amount.

Second, and this is the real one, you choose the year, which means you choose the bracket. Your income is not the same every year of your life. It has peaks and valleys. A conversion lets you deliberately move retirement income out of the peaks and into the valleys.

That is the entire strategy in one sentence. You are moving taxable income into your lowest tax years on purpose, instead of letting the government pick the year for you.

Why a conversion helps

If it were only about the rate, this would be simple arithmetic. But there are four more reasons a conversion helps, and these are usually what tips the decision.

Reason one. Required minimum distributions. Once you turn seventy three, the government forces you to pull money out of the traditional bucket whether you want it or not, and every dollar is taxable income. Arrive at seventy three with two million dollars in an IRA and your first forced withdrawal is roughly seventy six thousand dollars, on top of Social Security and any pension. That is income you did not ask for, and the required percentage climbs almost every year after. Every dollar you convert beforehand permanently shrinks that number.

Reason two. A Roth IRA has no required distributions during your lifetime. None. You never have to touch it. It can sit there compounding for thirty years while you spend from other accounts. There is nothing else in the tax code that does that.

Reason three. What happens to your spouse. This one is quietly brutal and almost never discussed. When one spouse passes away, the survivor eventually files as a single taxpayer. The brackets for a single filer are roughly half as wide, but the household income often stays close to the same. So the survivor gets handed a tax increase in the worst year of their life. Roth money is completely invisible to that problem.

Reason four. Your kids. When a child inherits a traditional IRA, current rules generally require them to empty it within ten years, and every withdrawal is taxable to them. Those ten years usually land squarely in their peak earning decade, at their highest rates. A child who inherits a Roth still empties it within ten years, but every dollar comes out tax free. It is one of the cleanest things you can hand down.

And there is a fifth benefit that is harder to put a number on. Flexibility. With money in both buckets, you control your own taxable income. You pull from the traditional side up to the top of a bracket, then switch to the Roth. That control is worth a lot in the year you need a new roof or a new car.

Real numbers: Tom and Susan

Let me put real numbers on this.

Tom and Susan are both sixty four and retired last year. They have one point two million dollars in a traditional IRA, a taxable brokerage account alongside it, and they are delaying Social Security until seventy to lock in the larger benefit.

So right now their only income is about forty thousand dollars a year from a small pension and interest. That is it. They are in the lowest tax bracket they will ever see again, and it is going to last about nine years.

Here is what one of those years looks like. The standard deduction for a married couple in twenty twenty six is thirty two thousand two hundred dollars. Subtract that from their forty thousand, and their taxable income is seven thousand eight hundred dollars.

Now, the twelve percent bracket for a married couple runs all the way up to one hundred thousand eight hundred dollars of taxable income. Which means Tom and Susan have ninety three thousand dollars of completely unused room in the twelve percent bracket and below. Empty space, every single year. And if they do nothing, that space expires.

So they convert ninety three thousand dollars. What does that cost? Seventeen thousand of it fills the rest of the ten percent bracket, and seventy six thousand fills the twelve percent bracket. Total federal tax on the conversion is ten thousand eight hundred and twenty dollars. That is an effective rate of about eleven and a half percent on the money they moved.

Now compare that to doing nothing. The IRA keeps growing. At a six percent return, one point two million dollars becomes roughly two million dollars by the time they turn seventy three, and the first required withdrawal is about seventy six thousand dollars. Add two Social Security checks and the pension on top, and they are firmly in the twenty two percent bracket, in a year where they have no flexibility left.

So the same ninety three thousand dollars costs them ten thousand eight hundred and twenty dollars today, or twenty thousand four hundred and sixty dollars later. That is about nine thousand six hundred dollars saved in one year. And they have nine of these years. Meanwhile that money compounds tax free for the rest of their lives, and then for ten more years in their children's hands.

One critical detail. Tom and Susan pay that tax bill out of their brokerage account, not out of the IRA. That matters enormously, and I will come back to why in one minute.

When it makes sense and when it does not

So when does this actually make sense?

The classic window is what I call the gap years. That stretch after the paychecks stop but before Social Security and required distributions start. For a lot of people that is roughly sixty two to seventy three, and it is the lowest income period of their entire adult life.

But there are others. A year you took a sabbatical or lost a job. A year your business ran a loss. A year with a very large deduction. A market drawdown, which is the underrated one, because converting when your account is down twenty percent means you pay tax on twenty percent less money and the entire recovery happens inside the Roth. And the case I see constantly, someone whose IRA is enormous relative to everything else they own.

Now the other side, because this is genuinely not for everyone.

Do not convert if you are in your peak earning years and today is the highest rate you will ever pay. That is the strategy running backwards.

Do not convert if you are about to move from a high tax state to a state with no income tax. Wait until you get there.

Do not convert money you plan to give to charity anyway. From age seventy and a half you can send IRA money straight to a charity as a qualified charitable distribution, up to one hundred eleven thousand dollars per person in twenty twenty six, and it never shows up as income. Converting it first just means you paid tax you never owed.

Do not convert if you will need that specific money within five years and you are under fifty nine and a half. Each conversion carries its own five year clock before you can touch it without a penalty.

And do not convert if the only way to pay the tax is out of the IRA itself.

Five mistakes

Which brings me to the mistakes. There are five.

Mistake one, and the most expensive. Paying the tax with IRA money. If you convert one hundred thousand dollars and pull an extra twenty four thousand out of the same IRA to cover the bill, that twenty four thousand is also taxable, and if you are under fifty nine and a half it takes a ten percent penalty on top. You also just shrank the balance you were trying to grow. Pay the tax from outside money, or do not do the conversion.

Mistake two. Ignoring the pro rata rule. If you have after tax money sitting in a traditional IRA, you cannot cherry pick and convert only that piece. The IRS treats every traditional, SEP, and SIMPLE IRA you own as one single pot and taxes your conversion proportionally across all of it.

Mistake three. Forgetting Medicare. Your premiums are set by your income from two years earlier. In twenty twenty six a married couple crosses the first surcharge tier at two hundred eighteen thousand dollars. Go one dollar over and the surcharge applies for the whole year. A conversion at sixty three can raise your premiums at sixty five.

Mistake four. Assuming you can undo it. You cannot. Before twenty eighteen you could reverse a conversion if the market moved against you. That option was eliminated. Once you convert, it is permanent, which is exactly why you size it deliberately instead of doing it all at once.

Mistake five. Forgetting to actually pay the tax during the year. A conversion does not withhold anything automatically. Convert in March, do nothing else, and you can owe an underpayment penalty in April even though you eventually paid in full. Make an estimated payment.

The way to avoid all five is the same. Do not treat this as one big decision. Treat it as a dial you turn a little bit every year, sized to the bracket you are trying to fill.

The close

So let me bring this back to where we started.

Your traditional retirement account is a partnership with the IRS where they get to set their share later. A Roth conversion is you buying them out early, at a price you can actually see.

It was never really about tax free growth. It is about the rate. If you can pay twelve percent today instead of twenty two or twenty four percent later, that is worth thinking hard about. And the years where that is true are usually few, they are usually short, and most people let them pass without doing a thing.

If you are in that window right now, or you think you might be in a few years, and you want to talk through what it looks like against your own numbers, reach out. My email is on the screen and in the description below, and I read every message that comes in.

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