Roth conversions: pay tax now or later?

How a conversion works

You move money from a traditional IRA (or a rolled-over balance) into a Roth IRA. The amount you convert is added to your taxable income for that year. After that, qualified withdrawals from the Roth are tax-free, and the original owner never has to take required minimum distributions.

When it can make sense

Conversions tend to work best in years when your taxable income is unusually low. A common window is the gap between the day you retire and the day Social Security and RMDs begin.

They can also help if you expect higher tax rates later, want to leave tax-free money to heirs, or want more control over your taxable income in the future.

The pitfalls

Bracket jumps. A large conversion can push you into a higher tax bracket in a single year. Many people convert in smaller pieces over several years.

Medicare surcharges. Medicare premiums can rise based on your income from two years earlier, so a big conversion can raise your premiums later.

Social Security taxes. A conversion raises your income for the year, which can make more of your Social Security taxable.

No undo button. Conversions made after 2017 cannot be reversed.

Paying the tax. It is usually best to pay the tax from money outside the account being converted. Using the converted money to pay the tax shrinks the benefit.

The five-year rule. Each conversion has its own five-year clock for penalty-free access to the converted amount if you are under 59½.

Where the TSP fits in

Federal employees often hold a large traditional TSP balance. Converting generally involves rolling money out of the TSP first, so weigh the loss of TSP features before you do.