Skip to main content
Created: April 29, 2021
Modified: May 14, 2024

Episode 43: When is the Best Time to Convert to a Roth?

Have your question answered on the Money Wisdom Question Series!

Thank you for joining us for episode 43 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is “When is the best time to convert money from a traditional retirement plan over to a Roth retirement plan?”

Which Tax Bracket Will You Be In When Using the Money?

If you think you’re going to be in a higher tax bracket when you use the money in your retirement plan than you are today, you should probably consider converting. Why do I say that? By taking money out of a traditional retirement account, you pay taxes on that money today while you’re in a lower tax bracket. Then, by putting the money put into a Roth IRA, all your money is going to be tax-free in the future.

Here is an example. Let’s say I’m in a 25% tax bracket today and I take the money out of my retirement plan. I take $100,000 and put it into a Roth IRA. I’m going to have to pay taxes on that $100,000 at 25% ($25,0000).* But now that $100,000 is in that Roth IRA. It’s going to continue to grow if invested properly. Maybe it becomes $400,000 by the time I’m going to use it in retirement and that $400,000 is completely tax-free.

Alternately, if I were in a 30% tax bracket by the time I was in retirement, I would pay $120,000 in taxes on that $400,000 if I kept the money in a traditional retirement plan. If it’s in a Roth, I pay zero taxes down the road.

As a general rule, if you’re going to be in a higher tax bracket when you pull money out of a retirement account than you are now, it makes sense to possibly convert over to a Roth. Remember, as always, that there are a lot of other factors involved. I personally like the idea of having flexibility in retirement where I can have Roth money and I can have traditional IRA money and I get to decide where to take the money from each year.

Roth IRA vs Traditional IRA

For those of you that don’t quite understand what a Roth IRA is compared to a traditional IRA or traditional 401(k), let me explain.  When we put money into a traditional account, we get a tax deduction. When we take the money out of that account, we pay taxes on the money. In a Roth, when we put money into a retirement account, we don’t get a tax deduction, but when we take money out, it’s all tax-free.

The key here is growth. If the money grows over time, wouldn’t it be better to spend the money tax-free than to pay taxes on all that growth? It becomes a little complex. Some of you understand what I mean by all these terms and some of you don’t and that’s OK. Ask us for more information if you want.

Ultimately, if you think you’re going to be in a higher tax bracket when you use your retirement money than you are today, it may be a real good idea to convert over to a Roth.

Thanks for joining me and I hope you found this information helpful!

P.P.S. Feel free to submit questions here for a chance to have them answered!

* This example assumes taxes of $25,000 are paid with funds outside of the conversion. A distribution from a Roth IRA is tax-free and penalty-free provided that the 5-year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 59½, suffer a disability, make a qualified first-time home purchase, or die.

Information presented in our podcasts is considered current as of the created date. Over time, some information presented may become stale. We recommend you consult with your Financial Professional before making any changes based on information contained here.

Johnson Brunetti is a marketing name for the businesses of JB Capital and JN Financial.

Investment Advisory Services offered through JB Capital, LLC. Insurance Products offered through JN Financial, LLC.
The guarantees provided by any type of insurance contract are based on the claims-paying ability of the insurance company.

Resources by Topic

Subscribe to Our YouTube Channel

Share

Related Resources

Can I Get ‘Out’ of a Fixed-Rate Vehicle?

When you lock into a fixed-rate vehicle like a CD, fixed annuity, or fixed-indexed annuity, you’re committed to a specific interest rate for a set period. But what happens when after a few years, ra…

Are My Social Security Benefits Taxable?

If your total combined income exceeds certain thresholds, up to 85% of your Social Security benefits may be taxable. Understanding how Social Security is taxed can help you make informed decisions a…

What is the Social Security Fairness Act?

You may have heard about the Social Security Fairness Act, which was signed into law on January 5, 2025. But what is it and who does it help? In this week’s Money Wisdom Question Series, Ian Ferg…

How Can I Transition My Business Value into Money I Can Use?

Today’s question is a crucial topic for many of our clients who are business owners or have significant assets tied up in a business: How can I convert the value of my business into income for my re…

How Will My Retirement Account Withdrawals Affect My Taxes?

Retirement income planning requires thoughtful decision-making, especially when it comes to minimizing the amount you’ll pay in taxes. In this week’s Money Wisdom Question Series, join Jake Doser…

What Are Some Unexpected Retirement Expenses to Look Out For?

Today’s question is one we help our clients navigate all the time: What expenses might I be responsible for as I enter retirement? Nicholas J. Colantuono, CFP® joins this week’s Money Wisdom Ques…

How Can I Generate Low-Tax or Tax-Free Retirement Income?

Today’s question is: What steps can I take to generate low-tax or tax-free income in retirement? First and foremost, it’s essential to have a tax plan – one that fits within the context of your o…

Am I Carrying Too Much Debt in Retirement?

At any stage in life, debt can interfere with your financial goals. But what about when you retire? How much debt is too much? It depends on a variety of factors, including your income relative to y…

What Updates Can We Expect for Social Security in 2025?

A new year means new rules for retirement plans. Let’s start with one of the largest sources of income for millions of retirees: Social Security. What changes can we expect in 2025? Heath Grossma…

What Steps Should I Take If My Retirement Savings Fall Short?

One of the biggest fears today’s pre-retirees and retirees face is running out of money in retirement – but what happens when that once-distant fear becomes your reality? Today’s question address…
    Back to top
    Our Locations
    Johnson Brunetti
    Welcome to Our New Website!
    Everything was designed with you in mind, making our retirement planning resources more easily accessible to you.
    Check out your new resource center, where everything can be organized by article type or topic
    Are you ready to speak with a financial advisor?
    Skip to content