Roth Conversion Questions, Answered
Oswego and Aurora, IL, and virtually in all 50 states.
The short answer: A Roth conversion means paying tax now on retirement money so it can grow and come out tax-free later. Whether it fits you depends on your tax bracket today, your bracket later, Medicare, and your heirs. We model it with your CPA before you move a dollar.
Answered by Dr. Pat Pachciarz®, Private Wealth Advisor + Tax Strategist · Pinnacle Tax Strategies · Oswego and Aurora, IL, and virtually in all 50 states. Call 815-486-0722.
What is a Roth conversion?
A Roth conversion moves money from a pre-tax account, like a traditional IRA or old 401(k), into a Roth IRA. You pay income tax on the amount you move in the year you move it. After that, qualified withdrawals from the Roth are tax-free.
Is there an income limit for Roth conversions?
No. Income limits apply to direct Roth IRA contributions, not to conversions. Anyone with a traditional IRA or eligible plan money can convert, at any income level.
How is a Roth conversion taxed?
The amount you convert is added to your ordinary income for that year at the federal level. It is not subject to the 10% early withdrawal penalty when it goes straight into the Roth. Illinois generally does not tax qualified retirement income, and that generally includes IRA conversion income, so most of the planning is on the federal side.
When is a good year to convert?
Often a lower-income year: after you retire but before Social Security and required minimum distributions start, a sabbatical, a business loss year, or a year with large deductions. We look at your tax bracket now versus what we expect later, and we fill a bracket on purpose instead of by accident.
Can I undo a Roth conversion?
No. Since 2018, a Roth conversion can no longer be recharacterized, or undone. That is why we model the numbers with your CPA before you convert, and many people convert in pieces late in the year once their income is clearer.
What is the five-year rule for conversions?
Each conversion has its own five-year clock for the 10% penalty if you are under age 59½. Separately, earnings come out tax-free only after your first Roth IRA has been open five years and you are 59½ or meet another qualifying condition.
Will a Roth conversion raise my Medicare premiums?
It can. Medicare Part B and Part D premiums use your income from two years earlier, called IRMAA. A large conversion at 63 or later can raise your premiums two years out, so we size conversions around those income tiers.
Can I convert my required minimum distribution?
No. Once required minimum distributions apply, you must take that year's RMD first. Only money above the RMD can be converted.
What if I have after-tax money in my IRA?
The pro-rata rule applies. The IRS looks at all of your traditional, SEP, and SIMPLE IRAs together, so you cannot convert only the after-tax dollars. Your basis is tracked on IRS Form 8606, and we coordinate that with your tax preparer.
Should I pay the conversion tax from the IRA or from other savings?
When possible, paying the tax from savings outside the IRA keeps more money growing tax-free in the Roth. Withholding the tax from the IRA itself shrinks the conversion, and if you are under 59½ the withheld part can face the 10% penalty.
See our Tax Strategy & Planning service →
Educational information only, not individual tax, legal, or investment advice. Tax rules change, and your situation is unique. Talk with your own tax professional before making a Roth conversion. Sources: IRS Publication 590-A, IRS Publication 590-B, IRS Form 8606 instructions, Medicare.gov, and the Illinois Department of Revenue.