Should You Do a Roth Conversion?

When contributing to your IRA or 401(k) you have the option to do either tax-deferred or Roth contributions. The difference in these 2 types of contributions is when taxes are paid. For tax-deferred contributions, taxes have not been paid on the money you use to fund the account. Instead, you pay taxes when you withdrawal money from the account later on down the road. On the other hand, Roth contributions are made with money you have already paid taxes on. Thus, you do not have to pay taxes with you take distributions from Roth account and, as an added bonus, the growth in Roth accounts is tax-free.


So, when should you choose one over the other? Well, typically, the younger you are, it makes more sense to do Roth contributions. This is because Roth contributions are better when you expect your income to be higher in the future.


However, if you already have money in the tax-deferred environment, you can convert this money over to Roth. The timing of when to do these conversions is important though because you will owe money on the amount you convert to Roth since you didn’t pay taxes on the money you used to fund the tax-deferred account.


Below is a list of common times when doing Roth conversions might make sense for you:

  1. When markets are down.
    1. It might make sense to do a Roth conversion when markets are down because your portfolio will, most likely, also be down. Thus, you could get tax-free growth on the money you convert once markets recover.
  2. After you retire, but before you start claiming Social Security.
    1. It might make sense to do a Roth conversion after retirement, but before claiming Social Security, because you will likely be in a lower tax bracket.
  3. Current income is down for the year, or you expect future income to be significantly higher.
    1. This could be a beneficial time to convert tax-deferred money to Roth since these events generally indicate you would be in a lower tax bracket now than in the future.
  4. You have a taxable estate.
    1. When your heirs inherit a tax-deferred account, they are required to take distributions from the account and pay taxes on the distributions, just as you would have to do. Additionally, if you have an estate that exceeds the estate tax exemption, your heirs would also have to pay a estate taxes on the inheritance. Thus, they would be double taxed on the tax-deferred money. If you were to convert tax-deferred money to Roth, your heirs would not be required to take distributions from these accounts, and, should they choose to take distributions from inherited Roth accounts, they would not have to pay taxes on those distributions.
  5. You don’t have much tax diversification in your account types.
    1. If most of your accounts are tax-deferred or taxable accounts, converting to Roth could be beneficial for you. Having money in all account types (Roth, tax-deferred, and taxable) helps later on down the road when you start taking distributions from your accounts because it allows more flexibility and control over managing your tax bracket.


Every investor and portfolio is different. So, Roth conversions, while beneficial to many investors, might not be what is best for you. Therefore, you should consult with your financial advisor to determine the best course of action regarding you and your portfolio, both for short- and long-term goals.