How It Works, Plus the Pros and Cons

Roth individual retirement accounts (IRAs) are available to people who earn up to a specific amount of money. So, if you make more than this earnings threshold, you’re not eligible for a Roth IRA.

That means that you’re stuck paying taxes on withdrawals from your retirement account when you finally retire. Or, maybe you’re not.

Many retirement savers who aren’t eligible for a Roth IRA do a Roth conversion to reduce the taxes that they pay in retirement. They simply move their money from a traditional IRA to a Roth IRA.

This strategy is known as a Roth conversion. It’s also called a backdoor Roth IRA conversion because it allows people who aren’t ordinarily eligible for a Roth IRA due to their income to set one up by sneaking in through the back door, so to speak.

What Is a Roth IRA Conversion?

A Roth IRA conversion occurs when you move funds from a traditional IRA, simplified employee pension (SEP) IRA, or savings incentive match for employees (SIMPLE) IRA into a Roth IRA. In 2010, the federal government began allowing people to convert their accounts from traditional IRAs to Roth IRAs, regardless of their income.

People can generally invest in a Roth IRA only if their modified adjusted gross income (MAGI) falls below a specific limit.

For example, if you’re married filing jointly and you earn $240,000 or more per year in 2024 (rising to $246,000 in 2025), you can’t invest in a Roth IRA. Single and head of household filers, and those who are married filing separately, have a cutoff of $161,000 in 2024 (rising to $165,000 in 2025).

Fortunately, there are no income limits for Roth conversions.

Sound good? It can be. But, like most investment choices, a Roth IRA conversion has advantages and disadvantages.

Advantages of a Roth IRA Conversion

Lower Taxes

A key benefit of doing a Roth IRA conversion is that it can lower your taxes in the future. While there’s no upfront tax break with Roth IRAs, your contributions and earnings grow tax-free and are tax-free when withdrawn in retirement.

In other words, once you pay taxes on the money that goes into a Roth IRA, you’re done paying taxes, provided that you take qualified distributions.

While it’s impossible to predict what tax rates will be in the future, you can estimate if you’ll be making more money and, therefore, be in a higher bracket in retirement.

Withdraw Contributions Tax-Free Any Time

Another perk to a Roth IRA is that you can withdraw contributions (not earnings) at any time, for any reason, generally tax-free. Still, you shouldn’t use your Roth IRA as a bank account. Any money you take out now will never get the opportunity to grow. Even a small withdrawal today can have a big impact on the size of your nest egg in the future.

No RMDs

Moving to a Roth IRA also means that you won’t have to take required minimum distributions (RMDs) from your account once you reach age 73 after Jan. 1, 2023. If you don’t need the money, you can keep it intact and growing, and pass it on to your heirs.

Making the Case for a Roth Conversion

A Roth conversion makes sense in specific situations. For example, say you have a traditional IRA that you’ve been paying into for years. You’ve finally retired and have more income from your savings and investment account withdrawals than you believed you would have.

You and your spouse will also begin drawing Social Security in one year. You realize that your taxable income will increase and your tax bracket along with it. Your IRA withdrawals will then be taxed at a higher rate.

You decide to convert your traditional IRA to a Roth IRA because doing so will reduce your overall tax burden due to a higher tax bracket.

Disadvantages of a Roth IRA Conversion

Taxes Due Now

The most significant disadvantage of converting to a Roth IRA is the potentially whopping tax bill. If, for example, you have $100,000 in a traditional IRA and convert that amount to a Roth IRA, you would owe $24,000 in taxes (assuming your effective tax rate is 24%). Convert enough, and it could even push you into a higher tax bracket.

Of course, when you do a Roth IRA conversion, you risk paying that big tax bill now when you might be in a lower tax bracket later. While you can make some educated guesses, there’s no way to know what future tax rates (or your income) will be.

Added Complexities

Yet another common issue that many taxpayers face is contributing the full amount and then converting it when they have other traditional IRA, SEP, or SIMPLE IRA balances elsewhere.

When this happens, you’re required to compute a ratio of the monies in these accounts that have been taxed already vs. the aggregate balances that have not been taxed (in other words, all tax-deferred account balances for which you deducted your contributions vs. those for which you didn’t). This percentage is counted as taxable income. It’s complicated, so you should get professional help.

Five-Year Rule

Another drawback: If you’re younger, you must keep the funds in your new Roth IRA for five years and ensure that you’ve reached age 59½ before taking out any earnings. Otherwise, you’ll be charged not only taxes on earnings but also a 10% early distribution penalty (unless you qualify for the few exceptions).

Bear in mind that if you’re over age 59½ and you haven’t met the five-year rule yet (your account is less than five years old), your withdrawals will be subject to taxes but not penalties.

Making the Case Against a Roth Conversion

While a Roth conversion may seem to be a great idea at first, there are situations in which you wouldn’t want to convert. For instance, say you’re 54 and earning the most you ever have. You believe that the next five years will be your peak earning years, so you want to take advantage of it and keep contributing.

However, you’re in a higher tax bracket because you’re making more, so you’ll end up paying more taxes if you convert. In this case, you might want to wait until you’re in a lower tax bracket or not convert at all.

Remember, you must also wait five years after converting to begin tax- and penalty-free withdrawals. So if you think you’ll need to access the funds before that, the conversion might not be a good idea.

Paying the Tax Bill on a Roth IRA Conversion

If you do a Roth IRA conversion, how and when will you pay that tax bill?

The money in your IRA has grown tax deferred, which means it hasn’t been taxed yet. When you convert a traditional IRA to a Roth, the money in your account is considered additional income for that year.

It’s possible that that added income could push you into a higher tax bracket for that year. Be sure to consider that when planning.

However, you shouldn’t use funds from the account to pay taxes. The best way to pay the tax bill is to use money from a different account—such as from your savings or by cashing out a certificate of deposit (CD) when it matures. Here’s why:

Paying your taxes from your IRA funds instead of from a separate account will erode your future earning power. Say you convert a $100,000 traditional IRA. After paying taxes, you deposit only $76,000 into the new Roth IRA. From then on, you’ll miss out on all the money you would have earned on the original balance.

While $24,000 may not seem like a lot, compounding interest means that money could grow to almost $112,000 over 20 years at an interest rate of 8%. That’s a lot of money to forgo to pay a $24,000 tax bill.

Use the 2024 tax brackets below as you consider converting to a Roth IRA.