A Roth conversion lets you move money from a traditional IRA or 401(k) into a Roth account, triggering immediate taxes. The payoff arrives later. Once the money sits in a Roth for five years, you withdraw it tax-free in retirement, along with all growth.
The math works best if your tax bracket is lower today than it will be in retirement. Say you're semi-retired and earn $80,000 annually, placing you in the 22% federal bracket. You convert $50,000 from a traditional IRA to a Roth. You owe roughly $11,000 in taxes now. But if you'll land in the 24% or 32% bracket later, that tax hit shrinks relative to what you'd pay on withdrawals at higher rates.
Timing matters. You want to convert during years when you have low income. Maybe you quit work mid-year, took a sabbatical, or experienced a business loss. That temporary dip in earnings creates a window to convert at a favorable rate.
One pitfall: conversions boost your Modified Adjusted Gross Income. This can trigger Medicare premium surcharges (IRMAA) or reduce tax credits you'd otherwise claim. High-income retirees should run the numbers carefully.
The five-year rule applies per account. Convert money today, and you cannot touch it penalty-free for five years after conversion. Withdrawals before then face a 10% penalty plus income tax, unless you're disabled or meet other exceptions.
Backdoor Roth conversions appeal to high earners barred from direct Roth contributions. You contribute to a nondeductible traditional IRA, then immediately convert to Roth. Watch out for the pro-rata rule. If you hold other traditional IRA balances, the IRS taxes a portion of