KEY TAKEAWAYS:

• A Roth IRA conversion strategy creates value by lowering lifetime taxes, reducing required minimum distributions, and allowing tax-free growth.
• Timing matters—converting when marginal tax rates are lower, such as  early in retirement, can maximize long-term benefits.
• Not every situation calls for a conversion, but using specialized planning tools and expert guidance can help determine if the strategy is right for you.

Are you sitting on a substantial traditional IRA or 401(k) balance and wondering if converting to a Roth makes sense? Most people have heard of a Roth IRA and understand its unique tax treatment, but many think they cannot open or fund a Roth IRA due to income limitations. While income limitations do apply to direct Roth IRA contributions, there is more to the story.

In 2025, your ability to fund a Roth IRA completely phases out an Adjustable Gross Income Limit of $165,000 for single filers and $246,000 for married couples.

This is where a Roth IRA conversion strategy and the “backdoor Roth IRA” strategy can come into play.  

Here, we explore what a Roth IRA conversion strategy is and whether it makes sense for you. 

What is a Roth IRA Conversion Strategy?

A Roth IRA conversion strategy is a retirement planning approach that involves moving money from a traditional IRA or pre-tax 401(k) into a Roth IRA. Any amount of IRA (or rollover 401k) assets can be converted to a Roth IRA in any year regardless of income level. The Roth IRA conversion rules simply state that you must recognize the withdrawal amount as income in the year withdrawn and pay taxes according to your marginal income tax levels. Once the money is in the Roth IRA, it grows tax-free and can be withdrawn tax-free in retirement

The determination of how much and when to convert (if any) lies at the heart of constructing a Roth IRA conversion strategy. As retirement planning specialists, we have found that there are generally five economic drivers of value when considering a Roth IRA conversion strategy. These are all important to consider:

1). Marginal Tax Rate Differentials

Any withdrawal from a pre-tax retirement account is recognized and taxed as personal income in the year it occurs. That means that the best time to make those withdrawals is when you are at your lowest marginal tax rate, since you’ll pay the least in taxes. For some people, this may be years before retirement, and for some, this happens after retirement.

Claiming income and paying taxes when your marginal tax rates are lower is better than claiming income and paying taxes when your marginal tax rates are higher.  When an individual will be at their lowest marginal tax rate depends upon the prevailing tax policy and personal income level in any given year.  

With the recent passage of the One Big Beautiful Bill Act, many of the 2017 Tax Cuts and Jobs Act (TCJA) tax provisions have been made permanent, thus keeping marginal rates relatively low compared to historical periods.

Even with that permanence, the timing of a Roth conversion still matters. Converting when your marginal tax rate is relatively low can lock in tax efficiency.  A time an individual may be fortunate enough to be at a low marginal tax rate would be shortly after retirement if a retiree chose to fund retirement expenses in some portion (or even wholly) with after-tax savings for a period of time. (See our Insight entitled "Roth IRA Conversions - Hedge Against Higher Future Tax Rates") 

2). Lower Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are a key tax-related item that you can’t forget in the retirement planning process.

An RMD is an IRS-mandated amount of money that you must withdraw from pre-tax retirement accounts after you turn 73 (or 75 if born 1960 or later). Your RMD is calculated by dividing prior year-end account balances by a life expectancy factor in the IRS Uniform Lifetime Table.  

As you get older, RMDs typically increase and can become larger than you need to support your retirement expenses. This forces you to be taxed on income that may not even be needed and pushes you into a higher marginal tax bracket over time.

Converting pre-tax retirement funds to a Roth IRA account will decrease the balance of funds remaining in the pre-tax retirement account, thereby shrinking the base the RMD percentage is applied to, resulting in smaller RMD requirements. Smaller RMDs can also leave a larger Roth balance to grow tax-free, creating more flexibility and value for your beneficiaries.

3). Shifting Capital Appreciation

We hold investments intending to realize gains over time.  The longer we hold investments in pre-tax retirement accounts, the larger those balances will grow.  Eventually, the entire balance will have to be realized as income, whether through RMDs or inheritance, and income taxes paid.  By not converting funds to a Roth IRA, you are, in essence, choosing to pay income tax on the current value of your pre-retirement account balance plus all the future capital appreciation the investments will experience. 

By converting to a Roth IRA, you only pay income taxes once on the current balance being converted in any given year.  Once that balance is converted and reinvested, the growth of the capital from those investments is never again taxed.   

This can be especially powerful if you have a long investment horizon ahead, since more years of tax-free compounding can significantly increase the value of your Roth IRA—and potentially the wealth you leave behind to your beneficiaries.

4). Maximizing After-Tax Inheritance

As retirement planning specialists, we look beyond your lifetime to consider how your accounts will impact your heirs, if that is important to you. Any tax-favored account balance you leave to a beneficiary upon your passing has to be distributed entirely, and income taxes paid by your beneficiary at their marginal tax rate within ten years of your date of death.   

In the case of a Roth IRA balance being passed, your beneficiary would likely maximize the economic value of the account by waiting until year ten to let the investments continue to grow and compound as much as possible and then take the balance.  This strategy is made economically possible because your beneficiary does not have to pay taxes on distributions from the Roth IRA account you left (you already paid taxes when you funded your Roth IRA or converted assets to your Roth IRA).

If you pass, leaving your beneficiary a balance in a pre-tax retirement account, two potential issues arise.   First, unless your beneficiary is a spouse, it is likely they may still be working and may be in a higher marginal tax rate than you are being retired.   If this is the case, you could have passed on more wealth by converting to a Roth IRA and paying taxes at your lower marginal tax rate and then passing on a tax-free Roth IRA instead.  Second, your beneficiary will probably have to take a series of more linear distributions over the ten years to manage their tax situation.  

Suppose your beneficiary allowed the balance to grow and compound for the whole ten years. In that case, a large proportion of the balance will be taxed at your beneficiaries’ highest marginal tax rate, making the strategy less economically feasible. 

5). Tax-Efficient Withdrawal Coordination

Tax-efficient withdrawal coordination is about finding the optimal mix of retirement funding from your various investment account assets so that you pay the least amount of taxes over your lifetime.  

Let’s say you are married and filing jointly in 2025 and need $110,000 of taxable income to fund your retirement expenses. After applying the $30,000 standard deduction for married couples, your taxable income falls to $80,000. Here’s how your federal income tax would be calculated if all of that income came from a pre-tax retirement account:

• 10% on the first $23,850 = $2,385
• 12% on the next $73,100 (up to $96,950) = $8,772
• The remaining $6,050 falls into the 22% bracket = $1,331

That results in a total federal tax bill of $12,488.

If you had a Roth IRA account in addition to your pre-tax retirement account, and you could fund that last $6,050 of income needed from your Roth IRA instead and not pay 22% on it, you could save $1,331) in taxes every year.

Reminder: Roth IRA Conversions Must Be Completed by Calendar Year-End

Contributions to an IRA or a Roth IRA are required by the end of the tax year, which is April 15th the following year.  For instance, the tax year for 2025 ends on April 15th, 2026. Unfortunately, Roth IRA conversions must be made before the end of the calendar year.  For instance, the calendar year for 2025 ends December 31st, 2025.

How to Determine an Optimal Roth IRA Conversion Strategy

While many variables feed into creating an optimal Roth IRA conversion strategy, there is a mathematical solution given an individual’s financial situation and a set of market and tax rate assumptions.  

At Thrive Retirement Specialists, we have specialized retirement income planning software that we use that is specifically dedicated to this task.  The mathematically optimal solution may not always be a person’s right solution, but it is a great place to start. A Roth IRA conversion may not make sense for every person in every situation, but to many, a carefully constructed Roth IRA conversion strategy can unlock many valuable retirement planning strategies.

If you would like to learn more about how we can help you determine your optimal Roth IRA conversion strategy, you can schedule a complimentary call with one of our retirement planning specialists here.