Making the Most of Roth Conversions

October 22, 2025

Roth conversions continue to be a popular strategy for investors seeking long-term tax efficiency and flexibility in retirement. Today, nearly one-quarter of U.S. households own Roth IRAs, totaling more than $1.4 trillion in assets—and for good reason. Converting funds from a traditional IRA to a Roth IRA can help create future tax-free income and reduce required minimum distributions (RMDs) later in life.

But while the benefits can be significant, Roth conversions also require careful planning. The added income from a conversion can affect your tax bracket, Medicare premiums, Social Security taxation, and even eligibility for certain credits or deductions. Before making any moves, it’s important to understand how the rules work—and how to make them work for you.

Contributions vs. Conversions: Know the Difference

A Roth IRA contribution is money you add directly to a Roth account, subject to income and contribution limits.

A Roth conversion, on the other hand, involves moving pre-tax funds from a traditional IRA or employer plan into a Roth IRA. There are no income limits on conversions, and you can convert as much as you wish—but the converted amount is considered taxable income in the year of the conversion.

For 2025, Roth IRA contributions are capped at $7,000 (or $8,000 if you’re age 50 or older), and your ability to contribute directly phases out at higher income levels. If you earn too much to contribute directly, a “backdoor Roth” strategy—making a nondeductible traditional IRA contribution and then converting it to a Roth—can offer a legal workaround.

How Roth Conversions Work

When you convert pre-tax IRA assets to a Roth, you’ll owe ordinary income tax on the amount converted. After that, your money grows tax-free, and qualified withdrawals are also tax-free.

However, there are key rules to keep in mind:

●     RMDs come first: If you’re age 73 or older, you must take your required minimum distribution before converting any funds. Failing to do so can result in excess contributions and potential penalties.

●     Timing matters: A conversion is counted for the year the funds leave your traditional IRA, not when they arrive in your Roth. Converting on December 30 means it’s a current-year event—even if the deposit posts in January.

●     No do-overs: Since 2018, Roth conversions are irrevocable. Once the assets move, you can’t reverse the transaction.

Managing the Tax Impact

Because conversions add to your taxable income, timing and amount matter. Converting too much in one year could push you into a higher tax bracket or increase income-based costs such as:

●     Medicare Part B and D premiums (IRMAA): Higher income two years prior can raise your premiums.

●     Social Security taxation: More of your benefits could become taxable.

●     ACA subsidies: If you’re under 65 and on a Marketplace plan, a conversion could reduce premium assistance.

●     Capital gains: Higher income may cause your investment gains to be taxed at a higher rate.

That’s why many investors use a “micro-conversion” strategy—spreading conversions over several years to stay within a preferred tax bracket. This approach can help smooth out the tax impact while steadily building a tax-free retirement resource.

Roth Conversions and Estate Planning

Roth IRAs can also play an important role in estate planning. Under the SECURE Act, most non-spouse beneficiaries must fully withdraw inherited retirement accounts within 10 years. If those assets are in a Roth IRA, heirs can make those withdrawals tax-free, preserving more of your legacy. Converting now allows you to pay the tax at today’s known rates, potentially saving your heirs from higher taxes later.

When to Consider a Roth Conversion

A Roth conversion may make sense if:

●     You expect to be in a higher tax bracket later (either due to income growth or tax law changes).

●     You want to reduce or eliminate RMDs in retirement.

●     You plan to leave IRA assets to heirs and want to minimize their future tax burden.

●     You have cash available to pay the conversion taxes without dipping into retirement savings.

Planning Wisely

Roth conversions are powerful tools, but they’re not one-size-fits-all. A well-timed conversion can create lasting benefits—but the wrong timing can create avoidable tax costs.

Before converting, consider working with your financial advisor and tax professional to:

●     Model different conversion amounts and tax scenarios.

●     Evaluate how a conversion may affect Medicare, Social Security, or other benefits.

●     Coordinate with your broader financial and charitable giving plans.

The Bottom Line

Roth conversions can be a smart way to build future tax-free income, simplify estate planning, and increase financial flexibility. But they also require a clear understanding of how added income affects your broader financial picture. With thoughtful planning and professional guidance, you can take advantage of today’s tax landscape—and position your wealth for the long term.

Sources:

Taylor, Debra. “Roth Conversions: Rules, Risks, and Ripple Effects." www.horsesmouth.com. 21 Oct. 2025. https://www.horsesmouth.com/roth-conversions-rules-risks-and-ripple-effects. Accessed on 21 Oct. 2025.

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.