You should convert your 401(k) to a Roth IRA during years when your income is lower (like early retirement, before RMDs), when your account value has dipped (reducing the taxable amount), or if you anticipate being in a higher tax bracket in retirement than you are now, allowing for tax-free growth and withdrawals later. The key is to strategically pay the income tax now at a lower rate to avoid higher taxes in the future, potentially by spreading conversions over several years.
What Are Some Examples Of The Best Times For The Roth Conversion?
It doesn't make sense to do a Roth conversion if you expect to be in a lower tax bracket in retirement, can't afford the upfront tax bill without touching the converted funds, need the money soon (within 5 years), plan to leave the IRA to a charity, or if the conversion triggers Medicare premium increases (IRMAA) that outweigh benefits. Essentially, it's a bad idea when paying taxes now at a high rate costs more than the future tax savings, or if you lack cash and the time for the Roth to grow.
When you rollover a traditional 401(k) to a Roth IRA, the amount converted is taxed as ordinary income in the year of the conversion, potentially pushing you into a higher tax bracket, with rates ranging from 10% to 37% (or more with state taxes). There are no taxes or penalties if it's a direct, trustee-to-trustee transfer (no money touches your hands), but if you take a distribution, the IRS mandates 20% withholding, and you'll need outside funds to cover the full tax bill to avoid penalties.
While the taxes on a Roth conversion can't be avoided, savers can reduce the burden through several strategies like gradual conversions and timing adjustments. Those nearing retirement can weigh whether they have enough time left to offset conversion taxes through decades of future tax-free growth.
Trap: Having income taxes withheld when requesting a Roth conversionmight subject the withholding amount to a 10% additional tax. Distributions that are made from a traditional IRA before the owner reaches age 59½ are subject to a 10% additional tax, unless an exception applies.
A Roth 401(k) doesn't make sense if you expect your tax rate to be lower in retirement than it is now, as you'd prefer the upfront deduction of a Traditional 401(k) for bigger savings, though high earners can always contribute to a Roth 401(k) (unlike Roth IRAs) if their employer offers it, making the choice purely about tax-rate arbitrage between current and future income brackets.
The 4% rule is a retirement guideline: withdraw 4% of your savings in the first year, then adjust that dollar amount for inflation annually, aiming to make your money last 30 years, but it doesn't account for taxes (Roth IRA withdrawals are tax-free, unlike Traditional IRAs) or varying market conditions, so it's a starting point, not a rigid rule, especially for early or very long retirements.
December is a great time to consider Roth conversions, as it allows you to review your total income for the year and potentially take advantage of lower tax brackets, helping to reduce your overall tax liability.
Financial expert Suze Orman is urging Americans not to wait when it comes to opening a Roth IRA. Even if you only have a single dollar to contribute, she says in a recent episode of her "Women & Money" podcast, getting an account started now can save you from future tax headaches.
You should not open a Roth IRA if you have no earned income, if your income is too high (exceeds IRS limits), or if you expect to be in a lower tax bracket in retirement, as a Traditional IRA might offer bigger upfront tax savings. People needing immediate tax deductions or who want tax-free growth but are close to retirement might also benefit more from Traditional IRAs or other options, say Fidelity and Investopedia.
The One Big Beautiful Bill increases the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 from 2025 through 2029. The higher SALT deduction cap may make Roth conversions more attractive by lowering the overall tax burden during the conversion year.
To avoid the 22% tax bracket (or any higher bracket), focus on reducing your taxable income through strategies like maxing out 401(k)s and HSAs, deferring bonuses, tax-loss harvesting, smart charitable giving, and strategic asset location, understanding that higher rates only apply to income within that bracket, not your entire income.
A conversion will always come with a tax bill. If you don't have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. It's possible to pay the tax out of the funds being converted, but this will erode your nest egg.
The potential for more stock market volatility means now may be a good time to consider the possible benefits of a Roth IRA conversion. If you convert pre-tax (or traditional) 401(k) or IRA assets to a Roth IRA or Roth 401(k), you'll owe taxes on the converted amount.
Tax Implications
A Roth IRA conversion means the amount converted will be added to your taxable income and taxed at your ordinary income tax rate. The U.S. tax system has rates from 10% to 37% in 2025, so conversions can push income into higher brackets.