Question 1

What is a Roth conversion and should I do one?

Accepted Answer

A Roth conversion moves money from a traditional IRA or eligible retirement plan into a Roth account, generally triggering income tax on pretax amounts. Qualified future withdrawals are tax-free. Consider one when your current tax rate is relatively low, you can pay taxes from outside funds, and the expected long-term benefits outweigh the upfront cost.

Question 2

How much tax will I pay on a Roth conversion?

Accepted Answer

The converted pretax amount is added to your taxable income for the year and taxed at your ordinary rates. Converting $100,000 while in the 24% bracket, for example, would cost about $24,000 in federal tax, plus any state tax. A large conversion can push you into a higher bracket and raise Medicare premiums, so many people convert in stages over several years.

Question 3

Is a Roth conversion worth it?

Accepted Answer

It is most often worth it when your tax rate today is lower than you expect it to be later, when you can pay the tax from money outside the IRA, when the money can stay invested for years, and when the conversion can be accompanied by a valuation discount. It is often less attractive if you need the funds soon or expect a lower tax rate in retirement.

Question 4

What is the five-year rule for Roth conversions?

Accepted Answer

Each conversion has its own five-year clock. If you are under 59 and a half and withdraw converted money within five years, you may owe a 10% penalty on that amount. Separately, earnings in a Roth IRA are tax-free only once the account has been open five years and you are 59 and a half or meet another exception.

What is a Roth conversion and should I do one?