Roth Conversion: What It Is and When It Makes Sense

It's early November, and Priya is adding up her freelance invoices for the year. The total is about $40,000. Last year, when she still had a salaried marketing job, she earned $95,000. A lower-income year sounds like bad news, and for her checking account it is. For her retirement accounts, it could be an opening, because this is the kind of year when a Roth conversion can make sense.

Priya is illustrative. Say she's 44, single, and spent this year freelancing between full-time jobs. She has $180,000 sitting in a traditional IRA, rolled over from old employer 401(k)s, and about $30,000 in savings. She has never paid a dime of income tax on that IRA money. Eventually she will.

The question is when. We'll follow Priya through that decision, run her numbers, and check in on her 12 months later.

The trade Priya is weighing

A Roth conversion means moving money from a pre-tax retirement account, like a traditional IRA, into a Roth IRA. The amount you move counts as taxable income in the year you convert. After that, the money grows in the Roth, and qualified withdrawals in retirement are tax-free.

So you're choosing when to pay the tax: now, at today's rate, or later, at whatever your rate turns out to be in retirement.

There's no income limit on conversions. Roth contributions phase out at higher incomes, but anyone can convert. The IRS overview of Roth IRAs covers the basic rules, including how qualified distributions work.

For Priya, the trade is simple to describe. She can pay tax on some of that $180,000 this year, while her income is unusually low, or leave it and pay tax on it decades from now, when it has grown and her income may be higher.

Why a low-income year changes the math

Federal income tax is progressive. Your income fills up brackets from the bottom, and each slice is taxed at that bracket's rate. A conversion stacks on top of whatever income you already have.

That's why Priya's year matters. In a normal year, her extra income would land in the 22% bracket. This year, there's room left in the 12% bracket.

Here are her numbers. To keep the math readable, we'll use a round $15,000 standard deduction. The actual figure changes yearly and has been in the $15,000 to $16,000 range recently for single filers. The IRS standard deduction page lists the current amount. We'll also ignore self-employment tax adjustments, which would lower her taxable income a bit further.

• Freelance income: $40,000
• Minus standard deduction: $40,000 − $15,000 = $25,000 of taxable income

For 2025, the 12% bracket for single filers runs up to $48,475 of taxable income, per the IRS table of federal income tax rates and brackets. Brackets shift with inflation each year, so check the table for the year you're converting.

Room left in the 12% bracket: $48,475 − $25,000 = $23,475.

That's Priya's sweet spot. She can convert roughly $23,000 and have every dollar taxed at 12%.

• Tax on the conversion: $23,000 × 0.12 = $2,760

Now compare a normal year. With a $95,000 salary, her taxable income would be about $95,000 − $15,000 = $80,000, solidly in the 22% bracket. Converting the same amount then would cost:

• $23,000 × 0.22 = $5,060

Same conversion, same account, $2,300 less in tax ($5,060 − $2,760), just because of timing.

The math that actually decides it

Saving $2,300 this year is nice, but the real test is what happens over decades. Here's the honest version, because conversions are often oversold.

Suppose Priya's $23,000 earns 7% a year until she's 65. That's 21 years. The broad U.S. stock market has historically returned more than that on average, but 7% is a reasonable, cautious planning number, and nothing about future returns is guaranteed.

• Growth factor: 1.07^21 ≈ 4.14
• $23,000 × 4.14 ≈ $95,240

If she leaves it in the traditional IRA and withdraws it at 65 in the 22% bracket:

• Tax: $95,240 × 0.22 ≈ $20,950
• She keeps: $95,240 − $20,950 = $74,290

If she converts it now, she pays $2,760 today and the full $95,240 comes out tax-free.

That looks like a blowout, but the comparison isn't quite fair. The $2,760 she pays in tax is money she could have invested instead. Let's account for it. If that $2,760 had grown at the same 7%:

• $2,760 × 4.14 ≈ $11,430

Subtract that opportunity cost from the Roth result: $95,240 − $11,430 = $83,810. That's still about $9,500 ahead of the $74,290 she'd keep without converting.

Now run the same exercise assuming she's in the 12% bracket in retirement too:

• Traditional: $95,240 × 0.88 ≈ $83,810
• Roth, after opportunity cost: $95,240 − $11,430 = $83,810

They're identical. That's the core lesson. A Roth conversion doesn't create money out of thin air. It wins only when your tax rate now is lower than your tax rate later. Priya's advantage comes entirely from paying 12% today instead of 22% tomorrow.

(In real life, the side-account version would be slightly worse for the traditional route, since the $11,430 would usually sit in a taxable account and owe some tax on its growth. That small edge tilts things a bit further toward converting, assuming she pays the tax from cash she already has.)

Paying the tax without wrecking the benefit

Where the $2,760 comes from matters a lot.

Priya should pay it from her savings, not by having taxes withheld from the IRA. If she converted $23,000 and had $2,760 withheld, only $20,240 would land in the Roth. Because she's under 59½, the withheld amount would also count as an early distribution, which generally means a 10% penalty on top of income tax. That's $276 more, plus a smaller Roth balance growing for 21 years. It's a self-inflicted wound.

Paying from savings has its own cost: $2,760 is about 9% of her $30,000 cushion, in a year when her income is unsteady. Priya decides she can absorb it because she has a full-time offer starting in January. If she didn't, converting a smaller amount, or none, would be the smarter move. A conversion is never worth draining an emergency fund.

She also needs to pay the tax on time. Freelancers already make quarterly estimated payments, and a conversion adds to what's owed. One common way to avoid an underpayment penalty is the safe harbor: pay in at least 100% of last year's total tax liability (110% if last year's adjusted gross income topped $150,000) through withholding and estimated payments. Last year, Priya's salary withholding was far above what she'll owe this year, so if she's kept up her quarterly payments, she's likely covered. Still, she plans to send an extra estimated payment for the conversion in January to keep things clean.

Hidden costs that can erase the savings

The bracket math is the headline, but a conversion raises your income in ways that touch other parts of your finances.

Health insurance subsidies. This is the big one for Priya. Without an employer plan, she bought coverage through the ACA marketplace, and her premium tax credit is based on her income. Adding $23,000 to her income could shrink that credit, and she'd repay the difference at tax time. That could cost her more than the $2,300 she saved on brackets. Before converting, she plugs her new income figure into the marketplace estimate to see how her credit changes. In her case, she switched to a new employer's plan partway through the year, and the reduction is modest, a few hundred dollars. For someone on marketplace coverage all year, this alone can kill the idea.

Medicare premiums. For people 63 and older, higher income can trigger surcharges on Medicare premiums two years later. Priya is far from that, but older converters need to watch it closely.

Other income-based benefits. Student loan payments under income-driven plans and some state credits key off income too.

It's permanent. Since 2018, you can't undo a conversion. If the market drops 20% the week after Priya converts, she has still paid tax on the full $23,000. That's one reason many people convert late in the year, once their income is clear.

The five-year clock. Each conversion has its own five-year waiting period. If Priya withdraws converted money before age 59½ and before that five-year period ends, she generally owes the 10% penalty. Her converted dollars should be money she won't need soon.

Finally, there's the deadline. Unlike IRA contributions, which you can make until the tax filing deadline, a conversion must be completed by December 31 to count for that tax year.

When a conversion tends to make sense, and when it doesn't

Priya's case lines up with the classic setup: a temporary income dip, years until retirement, cash on hand to pay the tax, and a reasonable expectation of being in a higher bracket later.

Other common windows look similar. Early retirees often have a stretch of low-income years between their last paycheck and the start of Social Security. Those years can be ideal for converting slices of a large traditional balance before required minimum distributions kick in. Roth IRAs don't have required minimum distributions during the original owner's lifetime, as the IRS FAQ on required minimum distributions explains, which gives retirees more control over their taxable income later. People who expect to leave money to heirs in high tax brackets also sometimes convert, since Roth money can pass to them without the same income tax hit.

Conversions usually don't make sense if you're in a high bracket now and expect a lower one in retirement. They also tend to fall flat if you'd have to pay the tax out of the converted money while under 59½, if you'll need the money within five years, or if the extra income would cost you more in lost subsidies than you'd save. The deciding factor is always the same: your rate now versus your expected rate later, after counting every side effect.

Priya, 12 months later

Priya converted $23,000 on December 10, once her final invoices were in and her income was clear. She sent the tax from savings and paid a little extra in her January estimated payment.

Fast-forward a year. Assume her investments earned about 7%:

• Roth IRA: $23,000 × 1.07 ≈ $24,610, all of it future tax-free money
• Traditional IRA: $180,000 − $23,000 = $157,000, then $157,000 × 1.07 ≈ $167,990
• Savings: $30,000 − $2,760 = $27,240, which she's rebuilding with her new salary

The tax picture: she paid $2,760 on the conversion, plus a few hundred dollars in reduced health insurance credits. That's still well under the $5,060 the same conversion would cost in a normal salaried year.

She's now back at work earning $98,000, so she won't convert this year. At 22%, the math no longer favors it. Instead, she'll contribute to her new 401(k) and keep a note in her files: the next time her income drops, whether from a sabbatical, a job gap or early retirement, she'll run the bracket math again.

Priya didn't solve her retirement taxes in one move. She paid 12% on about one-eighth of her pre-tax savings and kept the rest for future low-income years. That's what a well-timed Roth conversion looks like: a deliberate trade made when the numbers clearly favor it.

FAQ

Can I convert only part of my traditional IRA?

Yes. You can convert any amount, from a few hundred dollars to the full balance, and you can convert in multiple years. Many people do partial conversions each year to fill a lower tax bracket without spilling into a higher one, which is exactly what Priya did.

Do I have to be under the Roth IRA income limit to convert?

No. The income limits apply to direct Roth IRA contributions, not to conversions. A high earner can convert, though at a high tax rate the math is usually less attractive unless they expect an even higher rate later.

Can I convert money from my current employer's 401(k)?

Sometimes. Many 401(k) plans now allow in-plan conversions to a Roth 401(k), but not all do. Once you leave an employer, you can typically roll old 401(k) money into an IRA and convert from there. Check your plan's rules, and remember the same tax math applies either way.

This article is for educational purposes only and is not personalized financial advice.