Roth conversions: What they are, how they work, pros and cons

Should you convert retirement savings?

Written byMP Dunleavey

Fact-checked byNancy Ashburn

Composite photo of a rabbit in a hat, then doves flying from hat.

Transforming your retirement savings.

Funding a Roth IRA is appealing chiefly because doing so can give you tax-free income in retirement. The trade-off, however, is that you fund a Roth with after-tax money, meaning you don’t get a tax deduction today. Plus, if your income is too high, you can’t fund a Roth.

The good news? You can get around the income restriction by doing a Roth IRA conversion—also known as a backdoor Roth. This strategy allows you to transfer funds from traditional tax-deferred accounts like an IRA, SEP or SIMPLE IRA, or traditional 401(k), pay taxes on the conversion amount, and enjoy tax-free withdrawals in the future.

Key Points

A Roth IRA conversion is when you transfer funds from a traditional IRA or 401(k) to a Roth IRA.
There are no income restrictions when doing a Roth conversion.
Converted funds are subject to taxes and the five-year rule.

Even if you’re not subject to the income restriction, you might decide that the tax structure of a Roth is a better fit for you, in which case you could convert to a Roth and pay taxes now rather than later.

A Roth IRA conversion isn’t for everyone. Understand the mechanics of a conversion, plus the pros and cons, before you decide to make the switch.

Quick recap: What is a Roth vs. a traditional IRA?

To put Roth IRA conversions in context, it helps to remember some of the key differences between a Roth and a traditional IRA, as well as other tax-deferred accounts such as 401(k)s and 403(b)s.

Traditional IRA:

The amount you contribute each year is pre-tax, meaning you can deduct it from your taxable income for that year. However, you owe taxes on the contributions, and any earnings that have built up over the years, when you withdraw the funds.
There are no income restrictions for contributing to a traditional IRA as long as you and your spouse are not covered by a retirement plan at work.

Roth IRA:

You fund a Roth IRA with after-tax dollars, and then qualified withdrawals on the contributions and on any earnings are tax free.
Roth IRAs have strict income limits. If you earn more than a certain amount, you can’t open or fund a Roth.

Learn more

Get a full rundown of the differences between traditional and Roth IRAs.

What is a Roth IRA conversion?

The name is a little misleading, as you’re not converting a Roth IRA. Rather, a Roth conversion simply means you transfer funds from a traditional IRA, or another type of tax-deferred account such as a 401(k), into a Roth IRA.

With conversions you follow the same tax rules as with conventional Roth IRA contributions. Any funds you convert will be added to your gross income and taxed at the corresponding marginal tax rate. But then you can take tax-free withdrawals in retirement, assuming certain conditions are met.

Does the five-year rule apply to a Roth conversion?

According to IRS guidelines, you must hold a Roth account for five years, and you must be at least 59 1/2, in order to withdraw your earnings penalty free. This is known as the five-year rule.

Roth conversions are no exception; you need to wait five years after the conversion (and be 59 1/2) before you can withdraw converted funds without incurring a tax penalty. If you already have Roth funds (outside the conversion) that you have held for more than five years, you can take distributions from those funds first (“first in, first out,” as accountants say). And the IRS allows quite a few exceptions under which you can sidestep the tax penalty. So, unless you encounter a dire hardship that isn’t on the list of exceptions, it’s unlikely that you’ll run afoul of the five-year rule. Still, as with many tax issues, there’s a bit of subjectivity (and a lot of paperwork) involved, so if you think there’s the slightest chance you’ll need to withdraw converted funds within the next five years—even if you’ll be over age 59 1/2 by then—don’t do a Roth conversion.

Note: The clock starts ticking on January 1 of the year you do the conversion. So if you do a Roth conversion in October of 2023, the earliest you could withdraw money would be January 1, 2028. And if you do more than one conversion—for example, if you convert three different amounts over three years—the five-year rule would apply to each one separately.

How do you transfer funds to a Roth IRA?

You can convert the funds by having your plan administrator facilitate the funds transfer, or by allowing the institutions that hold the two funds do the work.

You could also request the amount of the conversion in the form of a check made out to you, much like a 401(k) rollover. If you do this, you must deposit the funds into the Roth IRA within 60 days, or the funds may be subject to an additional 10% penalty.

Why would you consider a Roth conversion?

There are a few reasons or occasions when you might consider a Roth conversion:

Temporarily lower income. If you find yourself temporarily in a lower income tax bracket, perhaps owing to a layoff or job change, it might make sense to do a Roth conversion, as the tax you’d owe on the converted amount might be lower.
Higher retirement tax bracket. If you anticipate being in a higher tax bracket in retirement than currently, you might want to do a Roth conversion now and reap the benefits of tax-free income later. Suppose you’ve run the numbers on your expected annual withdrawals from your pretax 401(k) and IRA accounts. That money will be counted as income in the year you withdraw it. If you think your annual income will be higher in retirement than it is today, you might consider a Roth conversion.
Part of your estate plan. Roth accounts don’t have required minimum distributions (more on this below). So you can let a Roth IRA grow throughout your lifetime, take withdrawals if and when you need them, and/or leave the account to your heirs.

What is the best way to do a Roth conversion?

When doing a Roth conversion, you want to minimize the tax hit. The best way to do this will depend on your personal circumstances (as noted above), but you can also consider a staggered approach. Ideally, each year’s conversion (which is added to your gross income) won’t bump you into a higher tax bracket.

That said, if you take a staggered approach, remember that the five-year rule resets for each conversion.

What are the pros and cons of doing a Roth conversion?

As with any retirement strategy, a Roth conversion comes with some advantages and disadvantages.

Pros:

No income limit. There are no income restrictions when doing a Roth conversion. So the income cap that normally applies to funding a Roth doesn’t apply when you take the “backdoor” route.
No contribution limit. You can transfer any amount; you’re not bound by the standard annual contribution limits for Roth IRAs.
No RMDs. Required minimum distributions—a mainstay of pretax retirement plans—don’t apply to Roth accounts.

Cons:

No take-backs. Once upon a time (before 2017) it was possible to “un-convert” your Roth conversion back to a traditional IRA. This was called a Roth recharacterization, but this option is no longer available.
A cash-flow hit today. You have to pay tax on the conversion in the year you do it, so you’ll likely have to write a check to Uncle Sam the following April.
The five-year rule. Be sure to consider the timing of your conversion. Can you wait five years to withdraw the converted funds?

The bottom line

A Roth conversion is not for everyone. You must have specific tax-related goals in mind when you take this route, because the benefits of having tax-free income down the road have to outweigh the logistics and current-year tax hit required by the Roth conversion.

As with all matters governed by the IRS, it’s important to make sure you understand all the rules and restrictions. Assuming a conversion makes sense for your situation, setting up that tax-free income stream in retirement could be a boon.