6 Reasons Roth Conversions Could Work for You

Key Points – 6 Reasons Roth Conversions Could Work for You

What to Consider Before Doing Roth Conversions
Thinking About Your Current AND Future Tax Rates
The Five-Year Rule for Roth Conversions
Doing Roth Conversions While You’re in the Lowest Possible Tax Bracket
8 Minutes to Read

Could a Roth Conversion Work for You?

The idea of having more tax-free money to spend in retirement or to pass on to the next generation(s) can be very intriguing for a lot of people. However, if you ask our tax professionals the question, “Could a Roth conversion work for me?” they probably won’t give you a yes or no answer. They’ll likely say, “It depends on your situation.”

Along with reviewing these six reasons Roth conversions could work for you, download a copy of our Roth Conversion Case Studies white paper. It explains that there are several reasons why it could make sense for someone to do Roth conversions. It also explains why there are several reasons why Roth conversions might not make sense. Download your copy below and learn why the decision to do Roth conversions truly does depend on your situation.

Roth Conversion Case Studies

As you’re trying to determine whether Roth conversions could work for you, carefully consider these six reasons. And most importantly, make sure to consult a tax professional prior to taking any action.

Roth Conversions Can Be a Part of Your Tax Bucket Strategy
Starting Your Five-Year Clock
Income from Your Roth IRA Doesn’t Cause More of Your Social Security Benefits to Become Taxable
Income from Your Roth IRA Doesn’t Increase Your Medicare Premiums
No Required Minimum Distributions on Roth IRAs
Leaving a Legacy with the Help of Roth Conversions

1. Roth Conversions Can Be a Part of Your Tax Bucket Strategy

It’s important to have a long-term perspective when considering whether Roth conversions could work for you. When you’re trying to decide whether to do a Roth conversion, you need to compare your current tax rate to what your tax rate will be in the future.

In most cases, it makes the most sense to make contributions to a traditional 401(k) or IRA if your current tax rate will be higher than your future tax rate when your funds are withdrawn. Meanwhile, Roth contributions or conversions may be beneficial in situations when your current tax rate is projected to be lower than what it will be in the future.

Leading up to 2026, our team has been preparing for the possibility of the Tax Cuts and Jobs Act sunsetting after 2025. If it does sunset, tax rates would revert to the higher rates that were in place in 2017. That possibility is a big reason to consider Roth conversions as a part of your tax bucket strategy.

What If We Go Back to Old Tax Rates?

Since returning to the White House in January, President Donald Trump has stated that he wants to permanently extend the TCJA provisions that he signed into law during his first term, including current tax rates.₁ While there is a lot of uncertainty surrounding future tax rates, we want you to be prepared in the event that a sunset does take place, whether it’s after 2025 or sometime down the road if there’s a temporary TCJA extension.

Let’s look at 2025 tax rates compared to potential 2026 tax rates if tax rates sunset as scheduled.

FIGURE 1 – 2025 Tax Rates – Tax Foundation/IRS₂

The 2025 tax brackets above in Figure 1 are what you’ll use in 2026 for the 2025 tax filing season. Notice that the tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Now, let’s compare the 2025 tax rates to what 2026 tax rates would be if the TCJA sunsets after 2025.

Along with potentially reverting to higher tax rates, keep in mind that the 2026 tax brackets will need to be adjusted for inflation. Whether you do a Roth conversion in 2025 or future years, remember that you’ll be taxed on the conversion in the year of the conversion. However, the earnings and withdrawals will potentially grow tax-free and be penalty-free. More on that shortly.

Thinking Long-Term When Considering Roth Conversions

By doing a Roth conversion in 2025, you’re getting more money into the tax-free bucket at lower tax rates than what you would expect to pay in the future. To understand why that matters, you need to project what your total income will be in retirement. We’re not just projecting your income for the early years of retirement, but long term to factor in Required Minimum Distributions. Again, it’s all about the big picture. You need to see what tax bracket you’ll be in year after year.

When a lot of people need to start taking RMDs, that might bump them to a higher tax bracket. So, it might be the right choice to do that Roth conversion now while you’re still in a lower tax bracket to take advantage of the tax-free growth. The money in your IRA needs to come out at some point, and the goal is to take it out at the lowest tax rate possible. Roth conversions can be a way that you do that.

One of the key takeaways here is that Roth conversions aren’t an all or nothing thing. Doing methodical Roth conversions to stay in the lowest possible tax bracket is a big reason why you need to take a year-by-year approach.

2. Starting Your Five-Year Clock

In our next reason that a Roth conversion could be right for you, we look at starting that five-year clock for Roth conversions. There are actually two five-year rules for Roth IRAs—one for the earnings on Roth contributions and one for Roth conversions. When it comes to Roth distribution rules, the first dollars distributed are your contributions, followed by Roth converted funds, and then Roth IRA earnings.

Let’s first review the criteria that must be met for the earnings from Roth contributions to be tax-free and penalty-free.

You must fund a Roth IRA for five years prior to distributing any of the earnings generated within the account.
You must attain age 59½ at the time of the distribution.
If you withdrawal Roth IRA earnings prior to 59½ or that have been funded for less than five years, those earnings are subject to a 10% penalty and taxed as ordinary income.

Those same rules apply for Roth conversions as well, but there are additional components to consider. If you’re under 59½ and want to do a Roth conversion, you must wait five years before you can access those funds. If you access the converted funds or the earnings, this distribution will be subject to the 10% penalty.

For example, if you made a Roth conversion in 2020, the clock on the five-year rule started on January 1, 2020. Since you have satisfied the five-year rule on Roth conversions, you would be able to access the principal tax free. If you’ve also attained age 59½, you can access the full Roth balance tax-free and penalty-free since the five-year clock is up. Keep in mind that it could be beneficial to do larger Roth conversions earlier on because of the five-year rule.

Additionally, we want to make sure you’re aware that switching custodians is not considered a conversion or contribution. Therefore, the five-year rule is unaffected by this.

Misconceptions About the Five-Year Rule

Before we shift gears to the next reason that Roth conversions could make sense for you, we want to help clear the air about a few misconceptions about the five-year rule.

There is a belief that the five-year rule applies to each Roth IRA separately. That’s not true.
People also get concerned rolling over to another Roth IRA reset the five-year clock. That’s also not true.

3. Income from Your Roth IRA Doesn’t Cause More of Your Social Security Benefits to Become Taxable

Roth IRA income doesn’t impact how much your Social Security is taxed. Yes, you read that right. At least a portion of Social Security benefits are subject to ordinary income tax. To determine what percentage of your Social Security benefits are taxable, you need to understand how to calculate your provisional income. If you’ve already started claiming Social Security, you can see what your provisional income (the SSA refers to it as combined income) by using IRS Publication 915.₄

If you haven’t claimed Social Security yet, you can still use IRS Publication 915 to estimate your future annual benefit and determine your provisional income. It’s the sum of your gross income, any tax-free interest you have, and 50% of your estimated Social Security annual benefit. Roth IRA income isn’t a part of the provisional income formula. By doing Roth conversions, you’re depleting the money you have in tax-deferred accounts, which can help with avoiding higher Social Security taxes later in retirement.

If you’re a single filer and your provisional income is less than $25,000, $0 of your Social Security benefits are taxable. If it’s between $25,000 and $34,000, up to 50% of your benefits will be taxable. And if it exceeds $34,000, up to 85% of your benefits will be taxable. For taxpayers who are married and filing jointly, those two provisional income thresholds to keep in mind are $32,000 and $44,000.

4. Income from Your Roth IRA Doesn’t Increase Your Medicare Premiums

Another reason Roth conversions could work for you is that Roth IRA income also doesn’t increase your Medicare premiums. This pertains to something called Medicare IRMAA, which stands for Medicare Income-Related Monthly Adjustment Amount. Required Minimum Distributions from traditional IRAs can force you to pay additional Medicare premiums. Roth IRAs, on the other hand, don’t have RMDs. More on that momentarily.

One confusing component of IRMAA is that it’s based on your Modified Adjusted Gross Income from two years prior rather than the current or previous year. When trying to determine if you’ll be subject to an IRMAA surcharge in 2025, it’s important to understand that it will be based on your MAGI from 2023. You can see the 2025 IRMAA brackets below in Figure 3.

FIGURE 3 – 2025 IRMAA Brackets – Kiplinger/Department of Health and Human Services₅

5. No Required Minimum Distributions on Roth IRAs

We teased this in our last reason Roth conversions could work for you, but it bears repeating—there are no RMDs on Roth IRAs. If you have money in a traditional 401(k) or IRA, you can’t keep that money in those accounts forever.

The current required beginning date for RMDs is April 1 of the year after you turn 73. However, if you decide not to take an RMD until the first quarter of the year you turn 74, you must take two RMDs that year. There’s a 25% penalty for missed RMDs, which can be reduced to 10% if it’s corrected in a timely manner.₆ The IRS has granted relief for missed RMDs in 2021, 2022, 2023, and 2024, but said that trend would not continue in 2025 when issuing its final SECURE Act regulations.

The RMD age became 73 on January 1, 2023 when the SECURE Act 2.0 became law. Another SECURE 2.0 provision stated that RMD age will be 75 by 2033, so make sure you know what your RMD age is. Or better yet, consider doing Roth conversions since there are no RMDs on Roth IRAs.

6. Leaving Your Legacy with the Help of Roth Conversions

Last, but not least, we know how important it is to many individuals to leave a legacy. The tax-free aspect of Roth conversions not only can be beneficial for you, but to your beneficiaries as well. If you pass away and your child inherits your Roth IRA, most of the same rules apply to them. While they will be required to liquidate the account within 10 years after your death (just as they would with an IRA), they won’t be subject to RMDs and the Roth IRA distributions will be totally tax-free for them if it was held for the five years.

Reach Out to Us with Your Roth Conversions Questions

These are just a few reasons why Roth conversions could be right for you. But remember that there are also reasons why Roth conversions might not work for you.

We want you to be informed as you’re deciding whether to do Roth conversions and hope that these six reasons help you build confidence in your decision. If you have questions about Roth conversions and whether they make sense for you, start a conversation with our team below.

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The CPAs on our team work in tandem with our CFP® Professionals to review financial plans from a tax planning perspective. Their goal is to identify potential tax planning opportunities, such as Roth conversions. Determining whether Roth conversions work for you isn’t something you need to do on your own. Our team of professionals is here to help.

Resources Mentioned in This Article

Downloads

Roth Conversion Case Studies

Other Sources

[1] https://about.bgov.com/insights/elections/2025-tax-policy-crossroads-what-will-happen-when-the-tcja-expires/#which-tcja-corporate-tax-provisions-are-set-to-expire

[2] https://taxfoundation.org/data/all/federal/2025-tax-brackets/

[3] https://taxfoundation.org/blog/2026-tax-brackets-tax-cuts-and-jobs-act-expires/

[4] https://www.irs.gov/pub/irs-pdf/p915.pdf

[5] https://www.kiplinger.com/retirement/medicare/medicare-premiums-2025-irmaa-for-parts-b-and-d

[6] https://irahelp.com/slottreport/surprising-news-about-the-new-statute-of-limitations-for-missed-rmds-and-excess-ira-contributions/

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.