A Roth conversion moves money from a traditional retirement account into a Roth account. The converted amount is generally added to taxable income for that year.
What it means
A traditional IRA often holds money that has not been taxed yet. A Roth IRA uses different tax rules. A conversion changes which set of rules applies to the money.
People often study conversions in years when income is lower. The goal is not to avoid tax by magic. It is to choose when tax may be paid.
A simple example
You move $40,000 from a traditional IRA to a Roth IRA. That $40,000 is generally added to your taxable income for the year. You have not received $40,000 to spend, but the conversion can still increase the tax bill.
The added income may also change other costs or benefits tied to income. It could affect Medicare premiums in a later year or reduce help with an Affordable Care Act health plan. Instead of choosing $40,000 because it is a round number, you might compare several conversion amounts and see what each one changes before moving the money.
What people often miss
More income can affect Medicare premiums, Marketplace savings, tax credits, and other items. A good conversion amount is rarely just 'as much as possible.'
The rules are detailed, and a conversion generally cannot simply be undone. Check the tax result before moving the money.
Three questions worth asking
- How much taxable income will this add?
- What else changes when my income rises?
- Which account will pay the tax?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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