Roth conversions: What they are, how they work, pros and cons

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Transforming your retirement savings.

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Funding a Roth IRA is appealing chiefly because doing so can give you tax-free income in retirement. The trade-off, however, is that you fund a Roth with after-tax money, meaning you don’t get a tax deduction today. Plus, if your income is too high, you can’t fund a Roth.

The good news? You can get around the income restriction by doing a Roth IRA conversion—also known as a backdoor Roth. This strategy allows you to transfer funds from traditional tax-deferred accounts like an IRA, SEP or SIMPLE IRA, or traditional 401(k), pay taxes on the conversion amount, and enjoy tax-free withdrawals in the future.

Even if you’re not subject to the income restriction, you might decide that the tax structure of a Roth is a better fit for you, in which case you could convert to a Roth and pay taxes now rather than later.

A Roth IRA conversion isn’t for everyone. Understand the mechanics of a conversion, plus the pros and cons, before you decide to make the switch.

To put Roth IRA conversions in context, it helps to remember some of the key differences between a Roth and a traditional IRA, as well as other tax-deferred accounts such as 401(k)s and 403(b)s.

The name is a little misleading, as you’re not converting a Roth IRA. Rather, a Roth conversion simply means you transfer funds from a traditional IRA, or another type of tax-deferred account such as a 401(k), into a Roth IRA.

With conversions you follow the same tax rules as with conventional Roth IRA contributions. Any funds you convert will be added to your gross income and taxed at the corresponding marginal tax rate. But then you can take tax-free withdrawals in retirement, assuming certain conditions are met.

According to IRS guidelines, you must hold a Roth account for five years, and you must be at least 59 1/2, in order to withdraw your earnings penalty free. This is known as the five-year rule.

Roth conversions are no exception; you need to wait five years after the conversion (and be 59 1/2) before you can withdraw converted funds without incurring a tax penalty. If you already have Roth funds (outside the conversion) that you have held for more than five years, you can take distributions from those funds first (“first in, first out,” as accountants say). And the IRS allows quite a few exceptions under which you can sidestep the tax penalty. So, unless you encounter a dire hardship that isn’t on the list of exceptions, it’s unlikely that you’ll run afoul of the five-year rule. Still, as with many tax issues, there’s a bit of subjectivity (and a lot of paperwork) involved, so if you think there’s the slightest chance you’ll need to withdraw converted funds within the next five years—even if you’ll be over age 59 1/2 by then—don’t do a Roth conversion.

Note: The clock starts ticking on January 1 of the year you do the conversion. So if you do a Roth conversion in October of 2023, the earliest you could withdraw money would be January 1, 2028. And if you do more than one conversion—for example, if you convert three different amounts over three years—the five-year rule would apply to each one separately.

You can convert the funds by having your plan administrator facilitate the funds transfer, or by allowing the institutions that hold the two funds do the work.

You could also request the amount of the conversion in the form of a check made out to you, much like a 401(k) rollover. If you do this, you must deposit the funds into the Roth IRA within 60 days, or the funds may be subject to an additional 10% penalty.

There are a few reasons or occasions when you might consider a Roth conversion:

When doing a Roth conversion, you want to minimize the tax hit. The best way to do this will depend on your personal circumstances (as noted above), but you can also consider a staggered approach. Ideally, each year’s conversion (which is added to your gross income) won’t bump you into a higher tax bracket.

That said, if you take a staggered approach, remember that the five-year rule resets for each conversion.

As with any retirement strategy, a Roth conversion comes with some advantages and disadvantages.

A Roth conversion is not for everyone. You must have specific tax-related goals in mind when you take this route, because the benefits of having tax-free income down the road have to outweigh the logistics and current-year tax hit required by the Roth conversion.

As with all matters governed by the IRS, it’s important to make sure you understand all the rules and restrictions. Assuming a conversion makes sense for your situation, setting up that tax-free income stream in retirement could be a boon.