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

Published: April 29, 2021 | Updated on: April 30, 2021

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.

A s 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.


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.
This information is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Consult an attorney or tax professional regarding your specific situation.