As a Spokane financial advisor, I frequently ask clients entering retirement about Roth conversions. For those who have saved in their 401(k) s their whole careers, it's on their minds because they realize a huge looming tax bill with RMDs (currently at age 73). Spoiler alert: Roth conversions are not for everyone. After reading this, you'll know whether this strategy is for you. Roth conversions can be a very powerful estate-planning and tax-strategy tool. However, our team sees many misconceptions and mistakes surrounding this strategy. We'll let you know our thought process and tips for Roth conversions from CERTIFIED FINANCIAL PLANNER®'s perspective. Don't get caught paying thousands in avoidable tax. For more help, talk to one of our Spokane advisors for a free discovery call.
What are Roth conversions?
A Roth conversion is the process of moving funds from a pre-tax retirement account, such as a traditional IRA, 401(k), or similar account, into a Roth IRA. This involves paying taxes on the converted amount in the year of the conversion. Once the funds are in the Roth IRA, they grow tax-free and may be withdrawn tax-free in retirement. You can convert an unlimited amount of money, but that amount converted is considered income for tax purposes that year. A huge benefit of a Roth IRA is that you never have an RMD from that account, unlike a 401(k) or an IRA.
Who are Roth conversions for?
- Those who have large 401(k)/IRA
- There's an opportunity for years with low-income or stacking itemized deductions, potentially with those with low-basis stock or real estate.
- Don't plan to contribute all of their RMDs as a charitable distribution (QCD).
- Don't want to leave heirs with a tax bill.
When Roth conversions make sense
- The most common scenario for Roth conversions is after someone retires but before taking RMDs and/or Social Security. The thinking is that their income will dramatically drop after they stop working, which is a good chance they'll be in a lower tax bracket, allowing them to pay a low tax rate and convert it to a Roth IRA to grow tax-free.
- Roth conversions especially make sense when someone has a large IRA or 401(k) because once they start taking RMDs, the larger the account, the more they will be forced to take out. The RMD is considered income; if your IRA is big enough, it'll move someone into a higher tax bracket. Converting money from an IRA to a Roth IRA will lower the RMD amount, resulting in lower taxes.
- Estate planning is also a factor. Roth conversions can be a fantastic strategy if someone wants to pass money to their children without incurring tax liability. Unlike many assets that pass on to children with relatively no tax consequences, a 401(k)/IRA is 100% taxable income to your children, and they are forced to distribute the entire balance within 10 years. Many adult children will be in their prime earning years and may be paying the highest tax rates on this income. By converting the accounts to a Roth IRA, they can distribute tax-free. With this strategy, more tax is paid while living, but you'll save more tax overall on your wealth because you've saved on tax paid by heirs.
- Another estate-planning reason: if you're in Washington State and your estate is larger than the $ 3M exemption, consider reducing your IRA. If you're using the IRA to pay the taxes, it'll lower your overall estate. This isn't a very powerful technique for reducing your estate, but every bit helps avoid estate tax because it starts at 10% and goes up. For more powerful strategies to avoid estate tax, check out our case study on a couple, Jim and Linda, who faced that exact problem.
When Roth conversions don't make sense
- If someone has a small IRA or 401(k), doing Roth conversions may not make sense because the RMD won't push them into a higher tax bracket. To find out what your RMD would be, use this calculator.
- Someone plans to donate to charities or nonprofits via QCDs (Qualified Charitable Distributions) from their IRA (https://scfinancials.com/blog/f/avoiding-rmd-taxes). This means the money is never taxed. We will dissuade clients from Roth conversions if they plan to donate large amounts to charities or nonprofits over their lifetimes. Never being taxed is always better than being taxed at a low rate. We find that most scenarios strike a balance between doing QCDs and Roth conversions.
- Heirs of the estate aren't in a high tax bracket, or the heir's tax liability isn't a priority.
- There's a large business, home, or type of sale that pushes someone into a much higher tax bracket for that year or a multi-year buyout.
- If you have a high income, sometimes it just doesn't make sense, given the amount of real estate income, pensions, and Social Security coming in. Roth conversions would push them into a much higher income tax bracket (higher than their heirs).
Avoid 5-Year Rules:
Don't get caught by the five-year rule. There are a few five-year rules surrounding Roth IRAs/conversions:
- Before age 59.5, ensure you don't need to use the Roth conversion money within 5 years. Each conversion has a separate 5-year timer that you can't touch. For those over age 59.5, it applies only to earnings on the conversion. This typically isn't a problem for clients because they will use other investments and leave the Roth to grow tax-free. Even if they need to use the Roth IRA, they will tap into other non-converted contributions to the Roth IRA (which they can do at any time.)
- If you've never had a Roth IRA, you must wait 5 years before using the earnings without income tax penalties and wait until age 59.5 to access them without penalty. Check out our article on the differences between an IRA and Roth IRA.
- The final five-year rule applies to beneficiary Roth IRAs. These are what will go to your heirs when you die. If you do a Roth conversion and you die before the five-year timer is finished, they must still honor the five-year rule before distributing the converted funds.
Remember:
- Even if you never enter a lower tax bracket, doing a Roth conversion may still make sense. Looking at historical US income tax rates, we see that we are currently in a very low-income tax rate environment. It may still make sense even if we are forced to convert to a higher tax bracket. Given our country's status and our ever-growing snowball of debt, many predict we will see higher tax rates over the next 5, 10, or 20 years. If they increase, you or your heirs may be forced to draw from the IRA or 401(k) and pay those hypothetical future tax rates. Under that assumption, it makes sense to move money into a Roth IRA to grow tax-free before tax rates increase.
- You can pay the tax bill on the Roth conversion from your IRA or 401(k) account or from other funds. Paying the tax bill with savings or a taxable investment account allows you to convert more to get the maximum tax benefit.
- If you're already or about to retire and are wondering what you can do with your 401(k), check out our article on what your 401(k) options are when you retire.
In conclusion
Roth conversions can be a powerful tool for tax and estate planning, but they are not a one-size-fits-all strategy. It's important to carefully assess your situation, considering income, estate size, charitable giving, and goals. With thoughtful planning, a Roth conversion could be a key strategy for saving on taxes and leaving a legacy. If you're considering a Roth conversion in 2026, I recommend reaching out for our thoughts. Even if you don't plan to use us for financial planning or investment management, I'd be happy to discuss your plan over a quick call.
To find out if a Roth Conversion makes sense for you, meet with one of our Spokane financial advisors.
About the Author
Noah Schwab CFP® is a financial advisor in Spokane, Washington, helping retirees with $ 1M+ maximize their 401(k) with Roth conversions and tax strategies.
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Noah Schwab, CFP®, is a Spokane financial advisor specializing in helping retirees with tax-efficient retirement income strategies, Roth conversions, and estate planning. This article is for
