Created: April 29, 2021
Modified: November 11, 2022

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

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.S. If you enjoyed this topic and want to learn more, download your copy of, “Roth IRA Conversion: 7 Things to Know“.

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.
  • Sandy and Thomas C.
    Sandy & Thomas C. are clients of Johnson Brunetti and received no compensation for their statement.

    “We always felt our financial needs were in very capable hands. Alex Angst is great to work with. Our advisor always made us feel he had our best interests at heart and explained things so we could understand them.”

  • Lisa D.
    Lisa D. is a client of Johnson Brunetti and received no compensation for her statement.

    “Working with Johnson Brunetti has had a positive impact on my life by providing me with the knowledge, confidence, and peace of mind to move forward with my retirement plans. The process of getting to this point, through their guidance, has been informative and pleasurable.”

  • Ken D.
    Ken D. is a client of Johnson Brunetti and received no compensation for his statement.

    “I view your company as one that puts my interests first. I think that is very uncommon and very refreshing. “

  • Jeanne P.
    Jeanne P. is a client of Johnson Brunetti and received no compensation for her statement.

    “Matt does an awesome job! So easy to understand and he listens to our concerns and addresses them! happy I chose your firm!”

  • Anonymous
    This testimonial was provided by a client of Johnson Brunetti and received no compensation for their statement.

    “I have been pleased with the help and service I have received from the company. I have met several team members on Eric’s team and have found all of them very well prepared to meet with me when reviewing my portfolio. I always feel that I am an important customer and appreciate that very much. I hope the firm continues to focus on the customer and maintains its great service. I think you do a great job for someone like me!!!! I’m happy I chose your firm!”

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?
Johnson Brunetti

Investment Advisory Services offered through JB Capital, LLC.
Insurance Products offered through JN Financial, LLC.
Atlanta • Boston • Hartford | Tel: 800-208-7233

JB Capital LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. Information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.

JB Capital's Form ADV | Disclaimer | Privacy Notice | Client Relationship Summary

*Information about our Affiliation with the UConn Huskies

Johnson Brunetti is a sponsor of WFSB Better Money, WCVB Better Money Boston, WSB-TV Better Money Atlanta, WTNH Money Wisdom, and WTIC Money Wisdom.