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When Is The Best Time To Convert a Traditional To a ROTH IRA?

When Is The Best Time To Convert a Traditional To a ROTH IRA?

In simple terms, a Roth IRA conversion permits converting your money to a Roth IRA from a traditional or a pre-tax retirement account. If used properly, they can be a financial planning tool for investors. 

During Roth conversion, your funds are moved from pre-tax to post-tax status. Doing this sets off alarms such that tax will only be charged from the converted fund. Some other benefits come with Roth IRA conversion. 

Financially speaking, is Roth IRA conversion an excellent move?

Roth IRA conversion has proven to be beneficial. The idea behind the conversion is to move money from an account that pays tax to tax-exempt. 

In the subsequent paragraphs, we will discuss what time of the year is an optimal time to consider Roth conversions and how to complete one.


Best Time for Roth Conversion 

IRA conversion makes sense when your taxes are low, you have the money to pay the tax, and your income is reduced. This conversion means you pay your tax from your savings in the same year you move your money from traditional to Roth IRA. The primary benefit of this conversion is to set up a tax-free income for the future.


  1. Reduced Income Results in a Lower Tax Bracket

People in the lower tax bracket earn less in a given year. The best time to do a Roth conversion, in this case, is in a lower-income year. Although you will make less money, this can be an opportunity for converting your pre-assets to Roth status. 

A Roth conversion becomes more attractive for people with lower incomes. You will pay less income tax on the fund you convert when you receive less payment.

For instance, earning $175,000 in a year puts you in the 32% federal tax bracket. Yearly income at this bracket will most likely indicate a less-than-ideal year to consider a Roth conversion. 

You have the opportunity to complete a Roth conversion at a lower marginal tax rate in the lower-income year. Within the lower-income year, Roth conversion is best done at the end of the year.



  1. You Have the Money to Pay the Taxes

A period where income is down can be the optimum time to do Roth conversion, but a period of unemployment may not be the best time because there might not be enough cash to pay your taxes. 

You must spend time with your tax preparer so you can have a reasonable estimate of how much your tax might be before your conversion. You can also convert your traditional IRA gradually. For some people, it might be best to do a rollover after retirement in case your income is reduced.


Situations That Makes a Roth IRA Conversion More Profitable

Some of the events and situations that make a conversion more profitable will be discussed below:

  • Insufficient Tax Diversification

Tax diversification allows you to practice tax bracket management, control your tax rate, and control the money you spend when you are retired. In a high tax bracket, take tax-free distributions from a Roth IRA. However, when you are in a low tax bracket, take more money from a traditional IRA. 

Having investment assets in each one of the three accounts that have different tax consequences is Tax Diversification. The three accounts with tax consequences include the traditional IRAs and other tax-deferred accounts, taxable accounts, Roth IRAs, and other tax-free accounts.


  • Low Tax Rates

A great time to make your Roth IRA conversion is when there is a low tax rate. When you make your conversion at a low rate, you would not have to pay a higher tax rate in retirement. 

A Roth conversion is a powerful tax diversification tool, which is very good at financial planning.  

When you convert traditional to Roth IRA, you will immediately owe taxes because of the conversion, but you will be able to make tax-free withdrawals in retirement. Conversion makes more sense if you are in the higher tax bracket.


Roth conversions can be done at will; therefore, you can decide to leave your money in the pre-tax retirement accounts. You will be expected to withdraw in the form of RMDs (Required Minimum Distributions) when you attain 72 years. If you do your conversions at the right time, you can get away with paying less for your federal tax.



Pat Raskob
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