Roth Conversions: When the 'Juice Isn't Worth the Squeeze'
A year-end Roth conversion can pay off, but only under the right conditions. Here's how to tell when the upfront tax bill may outweigh the long-term benefit.
Short answer: A Roth conversion tends to make the most sense when your tax rate today is lower than the one you expect later, and you can pay the conversion tax from money outside the account. When those conditions are missing, the guaranteed tax cost now can easily outweigh the uncertain savings later. If you're weighing a conversion for 2026, the deadline is December 31, and CNBC recently highlighted that it isn't always worth the effort.
How a Roth conversion works
A conversion moves money from a pre-tax account, such as a traditional IRA or old 401(k), into a Roth IRA. The amount you convert counts as taxable income for that year. In return, future qualified withdrawals from the Roth are tax-free, and Roth IRAs have no required minimum distributions during the original owner's lifetime.
In effect, you pay tax now at a known rate instead of paying tax later at an unknown rate. The bet only pays off if the later rate would have been higher, or if tax-free growth and flexibility are worth a lot to you.
Key deadline: To count for tax year 2026, a conversion generally has to be completed by December 31, 2026. Unlike IRA contributions, there is no extension into the following April. Conversions also can't be undone, because recharacterization of conversions was eliminated starting in 2018.
When the squeeze may outweigh the juice
- You're in a high bracket now and expect a lower one later. If you're in your peak earning years and expect lower income in retirement, converting means paying tax at your highest rate to avoid a lower rate later.
- You'd have to pay the tax from the converted money. Using part of the IRA balance to cover the bill shrinks what ends up in the Roth. If you're under 59½, that withheld portion may also face a 10% early-withdrawal penalty.
- The extra income triggers other costs. A bigger income figure can raise Medicare Part B and D premiums through IRMAA surcharges, which use income from two years earlier. It can also shrink Affordable Care Act premium subsidies, make more of your Social Security benefits taxable, or phase you out of certain deductions and credits.
- You may need the money soon. Each conversion has its own five-year clock for penalty-free access to the converted principal if you're under 59½. A short time horizon also leaves less time for tax-free growth to make up for the upfront cost.
- You plan to move to a lower-tax state. Converting while you live in a high-income-tax state, then retiring somewhere with lower or no income tax, can mean paying state tax you might otherwise have avoided.
- The money will go to charity. Pre-tax IRA dollars left to a charity, or given through qualified charitable distributions after age 70½, may never be taxed at all. Converting them first means paying tax you didn't need to pay.
Example: comparing two scenarios
These are hypothetical, simplified numbers that ignore state taxes, investment returns, and other income effects.
Scenario A: Converting at a higher rate
Jordan converts $50,000 while in the 32% federal bracket and owes about $16,000 in tax. In retirement, Jordan expects to be in the 22% bracket. Leaving the money in the traditional IRA and withdrawing it later would cost about $11,000 in tax on that same $50,000. Converting costs roughly $5,000 more, before even counting a possible Medicare surcharge.
Scenario B: Converting in a low-income year
Casey has retired but hasn't started Social Security or required distributions yet, so taxable income is unusually low. Casey converts $30,000 that stays within the 12% bracket and owes about $3,600. If later RMDs plus Social Security would push that money into the 22% bracket, the same dollars would cost about $6,600 in tax. Converting saves roughly $3,000, and the Roth balance can keep growing tax-free.
The difference isn't the conversion itself. It's the gap between today's rate and tomorrow's.
Alternatives and next steps
- Run a tax projection first. Estimate your 2026 income and see how much room you have before reaching the next bracket or an IRMAA or ACA threshold.
- Consider a partial conversion. Converting only enough to fill a lower bracket can capture some benefit without a large tax spike. This can be spread over several years.
- Direct future savings to Roth accounts instead. Roth 401(k) or Roth IRA contributions build tax-free money without a conversion tax bill, if you're eligible.
- Watch for low-income windows. Gap years between retirement and RMDs, a job loss, or a sabbatical can be more efficient times to convert.
- Get personalized help. A tax professional or fee-only planner can model your situation, including state taxes, Medicare, and estate goals.
Bottom line
A Roth conversion means paying a certain tax bill now in exchange for possible savings later. It tends to work best in lower-income years, when you can pay the tax with outside cash and leave the money invested for a long time. If you're in a high bracket, would pay the tax from the IRA itself, or would set off Medicare or subsidy costs, skipping or scaling back the conversion may be the smarter move.
FAQ
Can I reverse a Roth conversion if I change my mind?
No. Since 2018, conversions can't be recharacterized, so it's worth running the numbers before December 31.
Do I have to convert my whole IRA at once?
No. You can convert any amount, and many people convert in smaller pieces over several years to manage their tax brackets.
Does a conversion affect Medicare premiums?
It can. Medicare's income-related surcharges use your income from two years earlier, so a 2026 conversion could affect 2028 premiums.
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