Roth Conversions Explained

With rising government debt and the potential for future tax increases, more people are considering whether a Roth IRA conversion makes sense. But understanding when and how to convert—and whether it benefits your long-term strategy—requires a closer look at your income, tax outlook, and retirement timeline.

Converting to a Roth IRA means paying taxes today on the converted amount. This can impact your tax bracket and total liability in the conversion year. If you’ll need the funds within five years, this strategy may not be appropriate. However, for those focused on long-term tax-free growth, the benefits may outweigh the short-term costs.

Here’s what to consider before initiating a Roth conversion—and how to do it in a way that supports your overall retirement goals.

What Is a Roth Conversion?

A Roth conversion transfers funds from a tax-deferred retirement account—like a traditional IRA, SEP IRA, or 401(k)—into a Roth IRA. Tax-deferred accounts are funded with pre-tax dollars, meaning taxes are paid later when you withdraw. Roth IRAs are funded with after-tax dollars and qualified withdrawals are generally tax-free.

When you convert, the transferred amount becomes taxable income. You’ll owe ordinary federal and state income taxes based on your marginal rate. The upside? Future withdrawals of both principal and earnings are tax-free, assuming holding rules are met.

Roth vs. Traditional IRA Comparison

Feature	Roth IRA	Traditional IRA
Tax-Free Withdrawals	✅ Yes (after 5 years)	❌ No (fully taxable)
Immediate Tax Deduction	❌ No deduction	✅ Yes, contributions deductible
Required Minimum Distributions (RMDs)	❌ No RMDs	✅ RMDs start at age 73

Advantages & Disadvantages of a Roth Conversion

There’s no one-size-fits-all answer. Here’s a simple breakdown to help guide your decision:

When a Roth Conversion Makes Sense	Yes/No
Expect Higher Future Tax Rate	✅ Yes
Currently Low-Income Year	✅ Yes
Funds Needed Within 5 Years	❌ No
State Has High Income Tax	✅ Yes (consider carefully)
Can Afford Immediate Taxes	✅ Yes

Penalty Exceptions That Apply to Roth IRAs

Early withdrawal penalties may be waived for certain qualified reasons. These same exceptions apply to both traditional and Roth IRAs:

Exception Type	Penalty Waived?
Unreimbursed medical expenses	✅ Yes
Health insurance premiums while unemployed	✅ Yes
Permanent disability	✅ Yes
Higher education expenses	✅ Yes
IRS levy fulfillment	✅ Yes

How Are Roth Conversions Taxed?

The full amount of your conversion is added to your taxable income for the year. You’ll pay ordinary income taxes on both pre-tax contributions and any gains. This may increase your overall tax bill and affect things like Medicare IRMAA or Social Security taxation. Be strategic about timing and conversion size.

How to Do a Roth Conversion

To initiate a Roth conversion:

• Open a Roth IRA (if you don’t already have one)
• Contact your IRA or 401(k) provider to request a conversion
• Submit the appropriate paperwork for a direct transfer

Foxcove Financial, as a licensed insurance advisor, can help coordinate the process and explain how a Roth conversion aligns with your income strategy.

What Is the 5-Year Rule for Roth Conversions?

Each Roth conversion has a unique 5-year holding period before funds can be withdrawn tax-free. Even if you’re 59½ or older, withdrawing converted funds before the 5-year window ends could result in penalties unless an exception applies.

Do You Have to Pay State Taxes on a Roth Conversion?

Yes—if you live in a state with income tax, you’ll owe state taxes on the converted amount that year. Some retirees relocate to tax-friendly states to manage this expense, but that’s a major lifestyle decision that deserves broader planning.

Where to Report Your Roth Conversion

You’ll report a Roth conversion on IRS Form 1040:

• IRA conversion → Line 15a (total) and 15b (taxable portion)
• 401(k) conversion → Line 16a (total) and 16b (taxable portion)

This amount will increase your adjusted gross income (AGI), which could affect your eligibility for other tax deductions and credits.

Is a Roth Conversion Right for You?

A Roth conversion may benefit you if:

• You expect your tax rate to rise in retirement
• You had a lower-income year and can absorb the tax hit
• You want to reduce RMDs from traditional accounts
• You can afford the tax liability now without tapping retirement funds
• You’re planning for long-term, tax-free income flexibility

When a Roth Conversion Makes Sense	Yes/No
Expect Higher Future Tax Rate	✅ Yes
Currently Low-Income Year	✅ Yes
Funds Needed Within 5 Years	❌ No
State Has High Income Tax	✅ Yes (consider carefully)
Can Afford Immediate Taxes	✅ Yes