What is a Roth conversion?

A Roth conversion is when you move money from a traditional IRA (or other pre-tax retirement account) into a Roth IRA. The converted amount is added to your taxable income in the year of the conversion, and you pay income tax on it now — in exchange for tax-free growth and tax-free qualified withdrawals going forward. This is financial education, not tax advice.

A Roth conversion is a taxable transaction: you take money that was contributed pre-tax (or grew tax-deferred) in a traditional IRA, SEP-IRA, SIMPLE IRA, or qualifying employer plan and move it into a Roth IRA. The IRS treats the converted amount as ordinary income in the year of conversion — you pay tax at your marginal rate now. In exchange, the money and its future growth come out tax-free in retirement (if you meet the qualified withdrawal rules). The IRS covers the rules in Publication 590-A and under Roth IRA conversions guidance.

When a Roth conversion can make financial sense

You expect higher taxes in retirement than now — if your current income is lower than your projected retirement income (e.g., a career gap year, early retirement before Social Security), paying tax at today's lower rate may be advantageous.
You have a large traditional IRA and want to manage RMDs — traditional IRAs require minimum distributions starting at age 73, which increase taxable income in retirement. Converting before RMD age reduces the future required withdrawal.
You want to leave tax-free money to heirs — Roth IRAs have no lifetime RMDs for the original owner, and inherited Roth IRAs allow tax-free distributions to beneficiaries (subject to 10-year rule under SECURE 2.0).
Backdoor Roth IRA — high earners above the Roth IRA income phase-out ($165,000 single / $246,000 married filing jointly in 2025) can contribute to a traditional IRA and then convert, a strategy called the 'backdoor Roth.' The pro-rata rule complicates this if you have existing pre-tax IRA balances — a CPA should review.

What makes a conversion potentially expensive

The converted amount stacks on top of your other income for the year. A large conversion could push you into a higher tax bracket, increase Medicare IRMAA surcharges (which are based on MAGI two years prior), phase out certain deductions, or trigger the net investment income tax. Partial conversions — converting a carefully sized portion each year — are often more tax-efficient than a single large conversion. Pay the tax from non-IRA funds if possible; using IRA funds to cover the tax bill reduces the benefit of converting.

The 5-year rule

Each Roth conversion starts its own 5-year holding period. To access converted funds penalty-free (if under age 59½), they must have been in the Roth IRA for at least 5 years. Note this is separate from the 5-year rule that governs qualified earnings distributions from a Roth IRA overall. The IRS addresses this in Publication 590-B — the interaction of the two 5-year rules is a common source of confusion.

Roth conversions require careful tax planning — consult a CPA

A poorly timed Roth conversion can push you into a higher bracket, trigger IRMAA surcharges, or create an unnecessary tax bill. ClearValue Lending is not a Registered Investment Advisor or tax advisor. Before executing a Roth conversion — especially a large one — work with a CPA or CFP who can model the year-by-year tax impact.

IRS Roth conversion rules

A Roth IRA conversion is a taxable event: the amount converted from a traditional IRA (or other pre-tax plan) is included in gross income in the year of conversion and taxed as ordinary income. — IRS — Roth IRAs: Conversions
Amounts converted to a Roth IRA are subject to a separate 5-year period for determining whether a distribution of that converted amount is a qualified distribution. — IRS — Publication 590-B
There is no income limit on Roth IRA conversions — any taxpayer with a traditional IRA, SEP-IRA, or SIMPLE IRA may convert to a Roth IRA regardless of income. — IRS — Roth IRAs

Key takeaways

A Roth conversion moves pre-tax retirement savings to a Roth IRA — you pay ordinary income tax now for tax-free growth and withdrawals later.
Best candidates: people in a temporarily lower tax year, those wanting to reduce future RMDs, or those planning to leave tax-free assets to heirs.
The converted amount counts as ordinary income for the year — poorly timed, it can push you into a higher bracket or trigger IRMAA surcharges.
Each conversion starts a new 5-year clock before that converted amount can be withdrawn penalty-free.
There is no income limit on conversions — the 'backdoor Roth' strategy uses this for high earners who exceed direct contribution limits.

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