Roth conversions continue to be a popular planning strategy for taxpayers, with nearly one-quarter of U.S. households owning Roth IRAs totaling more than $1.4 trillion.
While most Roth IRAs start with regular contributions, Roth conversions can be more tax-impactful, especially when done in large amounts. They require mathematical caution because the added income can ripple through multiple areas of a client’s finances.
As an advisor, you must be prepared to explain both the opportunities and the pitfalls.
To help increase awareness of the financial and tax impact of Roth conversions, cover the following points during Roth conversion discussions with clients.
Contributions vs. conversions: Limits vs. no limits
A client can make regular Roth IRA contributions and Roth conversions in the same year. But regular Roth IRA contributions are subject to restrictions that do not apply to Roth conversions. Restrictions on Roth IRA contributions include the following:
- Compensation requirement: An individual must have eligible compensation to cover their Roth IRA contribution. Eligible compensation includes wages, salaries, and self-employment income.
- Contribution limit: Regular contributions are capped at $7,000 ($8,000 if age 50 or older) for 2025, or 100% of compensation, whichever is less.
- Income limitation: Regular contributions are phased out at certain modified adjusted gross income (MAGI) levels depending on tax-filing status. See IRS Announces New Income Limits for IRA Contributions in 2025.
Savvy IRA strategy: The MAGI restriction can be bypassed by using the “backdoor Roth contribution” strategy, which involves converting a traditional IRA contribution to a Roth IRA. See the Horsesmouth article Backdoor Roth Contributions: Know the Rules.
Fundamental rules for conversions
A Roth conversion is included in the account owner’s income, with any pre-tax amount subject to ordinary income tax. If the taxpayer has any traditional, SEP, or SIMPLE IRA that includes after-tax and pre-tax amounts, the conversion will include a pro-rated amount of their pre-tax and after-tax balance. All traditional, SEP, and SIMPLE IRAs are aggregated and treated as one for this purpose.
In addition to these rules, remind clients of the following:
- Required Minimum Distributions (RMDs) first: If they are at least age 73 and converting this year, they must take their RMD before the conversion. Failure to do so will result in a conversion of the RMD. This RMD conversion could result in excess contributions to the Roth IRA, which can accrue a 6% excise tax each year until corrected.
Example:
Susan is 74 years old and has a $15,000 RMD due from her traditional IRA for 2025. She wants to convert $50,000 to her Roth IRA this year.
If Susan converts the $50,000 without first withdrawing her $15,000 RMD, the IRS will treat the first $15,000 as her RMD. Because RMDs are not eligible for rollover or conversion, that $15,000 is considered an excess contribution to her Roth IRA. Unless corrected, the excess will be subject to a 6% excise tax each year it remains in the Roth IRA.
To avoid this error, Susan must withdraw her $15,000 RMD first, then convert the additional $50,000 to her Roth IRA.
- Timing matters: A Roth conversion is a two-step process. Step one is a distribution from the traditional account, and step two is depositing the amount into the Roth IRA. The conversion applies to the year that the funds leave the traditional account.
Example:
David wants to convert $100,000 from his traditional IRA to his Roth IRA.
- He withdraws $100,000 on December 15, 2025.
- He deposits the $100,000 into his Roth IRA on January 2, 2026.
Because the funds left the traditional IRA in 2025, this is considered a 2025 Roth conversion, and David must report the $100,000 as income on his 2025 tax return.
What looks like simple calendar management can have major effects. Including $100,000 of income in 2025 instead of 2026 can change David’s marginal tax rate, his Medicare IRMAA exposure, or his eligibility for certain credits and subsidies. David’s CPA should help him determine whether to complete the conversion for 2025 or 2026 for maximum efficiency.
- Irreversibility: Roth conversions completed after 2017 cannot be recharacterized. Before the Tax Cuts and Jobs Act, a client could undo a conversion if the tax outcome was unfavorable or simply because they changed their mind. After 2017, once assets move to the Roth, the conversion is permanent.
Tax modeling: Lump-sum vs. micro-conversions
A Roth conversion is not an all-or-nothing strategy. And, spreading conversions across multiple years can help manage tax brackets and avoid spikes in income-based costs.
Example:
- Sally is in the 24% tax bracket.
- Sally has $400,000 in a traditional IRA.
- If she converts $100,000 per year, she remains in the 24% bracket.
- If she converts the entire $400,000 at once, she may move into a higher bracket.
By using micro-conversions, advisors can align conversion amounts with available tax bracket space while preventing excess income from spilling into higher brackets.
How Roth conversions affect other financial matters
Viewing Roth conversions only through the income tax lens is a mistake. Increased taxable income can ripple into many other areas of a client’s financial life:
- Medicare premiums (IRMAA): A conversion increases MAGI, which determines Medicare Part B and Part D premiums two years later. Even one dollar over a threshold can raise premiums for the entire year.
- Social Security benefits: Conversions increase provisional income, potentially making more Social Security benefits taxable (up to the 85% cap).
- Affordable Care Act (ACA) subsidies: Conversions raise MAGI, which may reduce or eliminate ACA premium subsidies for clients under age 65.
- Capital gains and dividends: Conversions increase ordinary income, which can push long-term capital gains and qualified dividends into higher tax brackets (from 0% to 15% or from 15% to 20%).
- Net Investment Income Tax (NIIT): Conversions can push income above the $200,000 (single) or $250,000 (married) thresholds, triggering the 3.8% NIIT.
- State benefits and credits: Some state-level benefits are tied to income limits. An example is senior property tax relief. Conversions may cause ineligibility.
- Estate planning advantages of Roth IRAs: Roth IRAs also provide important estate planning advantages. Under the SECURE Act rules, most non-spouse beneficiaries must fully distribute inherited retirement accounts within 10 years. That rule applies to inherited Roth IRAs as well. However, the difference is in taxation. Those distributions are income-tax free if the Roth IRA is eligible for a qualified distribution. Therefore, heirs can withdraw funds without adding to their taxable income, unlike inherited traditional IRAs, where withdrawals are taxable. (For more on beneficiary options, see the Horsesmouth article Final RMD Rules: Distribution Options for Designated, Non-Designated IRA Beneficiaries.)
For clients who want to leave a legacy, Roth conversions can be a valuable strategy to pay the tax now at known rates, rather than leaving heirs with large taxable distributions later. Conversions are especially attractive when the client expects their own future tax rate, or that of their heirs, to be higher than today.
Advisor action plan and key takeaways
Roth conversions are powerful wealth-building tools, but must be used strategically. Suitability requires looking beyond income taxes to the broader financial impacts.
Advisor action plan
- Identify clients with significant pre-tax balances and relatively low current tax rates.
- Run tax projections comparing conversion amounts across multiple years.
- Check IRMAA thresholds before recommending conversions.
- Coordinate with CPAs to align conversion strategies with tax planning.
- Incorporate charitable giving for philanthropically inclined clients.
- Document all discussions, assumptions, and outcomes.
Key takeaways for advisors
- Roth conversions must be completed by December 31 of the conversion year. There is no carry back.
- Conversions are permanent; recharacterization is no longer allowed.
- The impact extends beyond income taxes to Medicare, Social Security, ACA subsidies, capital gains, NIIT, and state benefits.
- Charitable giving can help offset conversion income.
- It is essential to determine short-term costs versus long-term advantages.
Strategic takeaway
Roth conversions are strategic moves that can impact a client’s tax and financial profile, both positively and negatively. For example, while conversions come with benefits such as eliminating lifetime RMDs and creating tax-free income, they can also bring near-term costs and ripple effects across other benefits.
Advisors who evaluate suitability, model multiple scenarios, and coordinate with tax professionals can help clients unlock the power of Roth IRAs while minimizing any negative impact.