ROTH CONVERSIONS
Pay tax now to skip it later — when it makes sense.
A Roth conversion moves money from a traditional IRA into a Roth IRA. You pay tax on the converted amount today, but future withdrawals — including growth — can be tax-free.
What Is a Roth Conversion — and Why Does It Matter?
A Roth conversion means moving money from a traditional IRA or 401(k) — where contributions were made pre-tax — into a Roth IRA, where future growth and withdrawals in retirement are tax-free. You pay ordinary income tax on the amount converted in the year of the conversion, but after that, the money grows and comes out tax-free for the rest of your life (and potentially your heirs' lives too).
Most retirement savers have the majority of their money in tax-deferred accounts. That means every dollar they withdraw in retirement will be taxed as ordinary income — including Required Minimum Distributions (RMDs) starting at age 73. A Roth conversion can reduce that future tax burden by shifting some of that money to tax-free territory before those withdrawals are forced.
Roth conversions aren't right for everyone, and the timing matters enormously. But for the right person at the right time, they can be one of the most powerful tax-planning moves available. The rest of this page will help you understand whether it's worth exploring for your situation.
Why people consider them
If you expect to be in a similar or higher tax bracket later, paying tax now at a known rate can be cheaper than paying it later at an unknown one. Roth dollars also don't carry required minimum distributions.
Why they aren't for everyone
Conversions add to this year's taxable income. If that pushes you into a higher bracket, raises Medicare premiums, or strains cash flow, the math can flip. Timing and amount matter.
The window that's easy to miss
Many people have a few low-income years between retiring and starting Social Security or RMDs. Those years are often the cheapest time to do partial conversions — but the window can close quickly.
What this means for you
A Roth conversion strategy should always be modeled before it's executed. Start with the Assessment, then we can dig in together.
FAQ
Common questions about retirement
The questions we hear most often from people trying to figure out if their plan really works.
What is a Roth conversion and how does it work?
A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA, paying ordinary income tax on the converted amount in the year of the conversion. Once inside the Roth account, the funds grow tax-free and can be withdrawn tax-free in retirement, as long as certain requirements are met. This strategy is often used as part of tax-efficient retirement planning in Wisconsin to reduce future required minimum distributions and manage lifetime tax liability. Because the conversion is taxable in the year it happens, timing matters significantly, and it's usually most beneficial to do partial conversions over several years rather than one large conversion.
Who should consider a Roth conversion in Wisconsin?
Roth conversions tend to make the most sense for people in a temporarily lower tax bracket, such as early retirees before Social Security and required minimum distributions begin, or those who expect tax rates to rise in the future. Wisconsin residents with large traditional IRA or 401(k) balances who want to reduce future RMDs, or who want to leave tax-free assets to heirs, are also good candidates. However, converting isn't right for everyone, especially if it would push you into a significantly higher tax bracket or if you'll need the funds within a few years. A personalized analysis is the best way to determine if conversions fit your situation.
How much tax will I owe on a Roth conversion?
The amount of tax owed on a Roth conversion depends on your marginal federal and Wisconsin state income tax rates, since the converted amount is added to your taxable income for that year. Converting a large sum at once can push you into a higher tax bracket, increase your Medicare premiums through IRMAA surcharges, or affect the taxability of your Social Security benefits. This is why many advisors recommend spreading conversions across multiple years to stay within a target tax bracket. Running the numbers before converting, ideally with the help of a financial advisor and tax professional, helps you understand the true cost and avoid unpleasant tax surprises.
What are the benefits of Roth conversions for retirement planning?
The main benefits of Roth conversions include tax-free growth and withdrawals, no required minimum distributions during your lifetime, and greater flexibility to manage your taxable income in retirement. Converting can also reduce the tax burden on your heirs, since inherited Roth IRAs generally pass tax-free, while inherited traditional IRAs are taxable to beneficiaries. For Wisconsin retirees focused on tax-efficient retirement planning, Roth conversions can be a powerful tool to diversify tax exposure across traditional, Roth, and taxable accounts. This flexibility allows you to choose which account to draw from each year based on your income needs and tax situation.
When is the best time to do a Roth conversion?
The best time for a Roth conversion is typically during years when your taxable income is lower than usual, such as early retirement before Social Security or pension income begins, or after a year with unusually high deductions. Converting before required minimum distributions start at age 73 can also reduce your future RMD amounts and the taxes associated with them. Market downturns can present an opportunity as well, since converting when account values are lower means paying tax on a smaller amount before the eventual recovery grows tax-free inside the Roth. A financial advisor can help you identify your optimal conversion window each year.
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Who Might Benefit from a Roth Conversion?
A Roth conversion isn't a one-size-fits-all strategy. It tends to make the most sense in specific situations — here are some of the most common ones worth considering.
You're in a Lower-Income Year
If your income is temporarily lower — perhaps you've retired early, taken a sabbatical, or had a business slowdown — you may be in a lower tax bracket than you expect to be in later retirement. Converting now means paying tax at today's lower rate.
You Expect Tax Rates to Rise
Nobody knows exactly what future tax rates will look like. If you believe rates will be higher in the future than they are today — either for you personally or broadly — converting now locks in the current rate.
You Have Time for Tax-Free Growth
The longer the money has to grow after conversion, the more valuable the tax-free status becomes. If you're 10 or more years from needing the funds, the math often favors converting.
Estate Planning Is a Priority
Roth IRAs are not subject to Required Minimum Distributions during the owner's lifetime, and heirs can inherit them tax-free. For those who want to pass wealth to the next generation efficiently, a Roth can be a powerful estate planning tool.
You Want to Reduce RMD Burden
Required Minimum Distributions from traditional IRAs and 401(k)s can push you into a higher tax bracket in your 70s — and those forced withdrawals may also affect Medicare premiums and the taxability of Social Security. Converting some funds ahead of time reduces that future pressure.
You Have a Balanced Tax Diversification Goal
Having a mix of taxable, tax-deferred, and tax-free accounts gives you flexibility in retirement to draw from whichever bucket is most advantageous in a given year. If all your savings are in pre-tax accounts, a Roth conversion can help rebalance that mix.
Key Things to Consider Before Converting
A Roth conversion can be a smart move — but timing and context matter. Here are the most important factors to think through before deciding whether it makes sense for you.
What's the tax cost in the year you convert?
When you convert funds, the converted amount is added to your taxable income for that year. Depending on how much you convert and your other income sources, this could push you into a higher bracket. It's important to model out the tax impact before moving forward — converting too large an amount at once can trigger more tax than you save. Many people convert in smaller increments over several years to manage the bracket exposure.
Could a conversion affect your Medicare premiums?
Medicare Part B and Part D premiums are based on your income from two years prior — a calculation called IRMAA (Income-Related Monthly Adjustment Amount). A large Roth conversion can temporarily spike your income and trigger higher Medicare premiums two years later. This doesn't mean you shouldn't convert, but it's a factor worth planning around — especially if you're 63 or older.
Do you have the cash to pay the tax bill?
Ideally, you pay the taxes on a Roth conversion from savings outside the IRA — not by withholding from the converted amount itself. If you use IRA funds to cover the tax, you reduce the principal that will benefit from tax-free growth. Having non-retirement cash available to cover the tax makes the conversion more effective.
How long do you have before you'll need the money?
The break-even point for a Roth conversion — where the tax-free growth outweighs the upfront tax cost — typically takes several years to reach. The longer your time horizon, the more favorable the conversion math becomes. If you expect to need the funds within a few years, the numbers may not work in your favor.
Is a partial conversion better than a full one?
You don't have to convert an entire account at once. Many advisors recommend converting just enough each year to fill up a lower tax bracket without crossing into the next one. This "bracket-filling" approach captures conversion benefits over time while keeping the annual tax hit manageable.
Not Sure If a Roth Conversion Makes Sense for You?
Everyone's tax situation is different. Scott Farrow at Farrow & Associates can help you look at your specific numbers — income, accounts, timeline, and goals — and figure out whether a Roth conversion fits your retirement plan. Before scheduling, the Retirement Assessment and Retirement Calculator are great starting points.
This page is for educational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional regarding your specific situation.