Roth conversion: the three checks to run before you convert

What a Roth conversion is

A Roth conversion moves money from a traditional 401(k) or IRA into a Roth account. The amount you move is added to that year's taxable income and taxed. In exchange, the money can then grow, and qualified withdrawals can be taken out, tax-free. There is no income limit on who can convert. A conversion cannot be undone once it is made.

A church bulletin said "Roth it all." Whether that is wise depends on three questions.

Check 1: Can your cash pay the tax?

The tax on a conversion is due with that year's tax return. The cleanest way to pay it is from cash outside the retirement account. If you pay it out of the account you are converting, you shrink the very money you are trying to move, and the tax comes out of dollars that were themselves taxable.

In Case File No. 3, Linda has $260,000 in a traditional 401(k) and $40,000 in cash. Converting the whole account in a year with $80,000 of other income, filing jointly, creates a federal tax bill of about $53,828. Her cash falls short by $13,828.

Check 2: Is today's rate lower than later?

A conversion makes sense when the tax you pay now is lower than the tax you would pay later on the same dollars. The tax code taxes income in layers, filling the lowest layers first. A conversion stacks on top of your other income and fills the layers from the bottom up.

The full conversion pays an average of 20.7% now. What would the tax be later? In the Case File's assumptions, Linda's retirement income would be small enough that her federal tax on withdrawals would be about $0 a year. Paying about 20.7% to avoid a rate near 0% is paying full price for something that may be free.

The check also finds room at 0%: in a low-income year, such as the years after retiring and before Social Security or required withdrawals start, you may be able to convert some money and owe no federal tax. In the example it is about $23,700.

Check 3: Does it cross a line?

A conversion raises your income for the year, and income sets your Medicare premiums two years later. Medicare charges an income-related surcharge, called IRMAA, above certain lines. In 2026 the first line is $218,000 for a married couple and $109,000 for a single filer. One dollar over a line moves you to the next step.

Linda's full conversion would bring her income to $340,000, which is over the $274,000 line, step 2. With one person on Medicare in two years, that is about $2,435 a year in extra Part B premium, and there is a surcharge on drug coverage as well. A smaller slice can stay under the line. Read how the Medicare surcharge works.

A conversion can also make more of your Social Security taxable. See how that works.

Why slices often beat one big conversion

Because the tax layers fill from the bottom, converting a little each year keeps more of the money in the lower layers. It can also keep you under the Medicare lines. Linda's plan in the Case File converts in small slices after retirement, where the federal tax is zero or low, rather than all at once in a year with wages.

Things that surprise people

• It cannot be undone. Once you convert, you cannot change your mind. Confirm the numbers first.
• Each conversion has its own five-year clock for avoiding the 10% early-withdrawal penalty on the converted amount if you are under 59½.
• Some 401(k) plans do not allow conversions inside the plan. You may need to roll the money into an IRA first.
• State income tax is not included in our numbers. Some states tax conversions and some do not.
• Health insurance before 65. If you buy coverage on the marketplace, a bigger income can reduce subsidies.
• Heirs. A Roth account can be an advantage for heirs in some situations. That is a separate question from the tax math above.

The verdict for Linda, and why it is only for Linda

For Linda's facts: not all at once, and not this year. A better plan builds the Roth in small slices after retirement. Your answer may be different. Put your own numbers into the free Roth Check, and talk to a tax professional before you convert.