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written by: victoria mcgruder, cpa, cpwa®

Many of you have Traditional 401Ks, IRAs or Rollover IRAs from previous employers and you may be thinking you missed the Roth IRA – tax free growth boat! And some of you may have thought about a Roth Conversion but the tax impact has you feeling uneasy and unsure about it being the right move for you. I can understand that.

A Roth Conversion is the process of converting a pre-tax retirement account (like a Traditional IRA or Traditional 401K) into an after-tax retirement account (the Roth). As a result, you will pay ordinary income tax on the conversion amount.

The Roth Conversion’s purpose is to pay tax today and provide you the opportunity to benefit from years of future tax free growth in the Roth investment vehicle.

Here are a few instances where a Roth Conversion may make sense for you.

You Are Young

If you are in your 20’s or 30’s and you have since left a company or two and are wondering what to do with your Traditional 401K(s) then I think it may be beneficial to consider a Roth conversion.

Why? First, because in theory, your income is lower than it probably ever will be (depending on future circumstances). As a result, you are in a lower tax bracket today than you likely will be as your income grows and as you get older.

So by converting, you will pay the tax at the lower rate today and benefit from years of tax free growth. As opposed to keeping the funds in the Traditional vehicle and pay tax at potentially higher rates on your full distribution during retirement.

Secondly, you will be taking advantage of years and years of tax free growth that the account will now be earning. The savings from the tax free earnings will likely pay for your current year tax bill in no time.

When the Market is Down

If you have been thinking about a Roth Conversion but the idea of the tax bill has been too overwhelming due to your account size, then consider a conversion when the market is down. At this point your account has ultimately gone down in value (for the time being) so when you convert, your tax burden has also been reduced.

You then will reinvest those funds in the new Roth IRA and when the market goes back up – those gains and future growth will no longer be taxable to you.

Your Income Takes a Dip

If your income takes an unexpected dip then perhaps the Roth conversion is not going to be top of mind for you – as you may not have cash readily available to pay for the tax bill due.

BUT, it is something important to understand about the benefit of timing in your decision to convert.

If your income dips considerably, your tax bracket has likely decreased as well and thus reducing your tax burden as a result of the conversion. Providing you with a considerable tax savings while you were in a lower tax bracket.

You Are Nearing Retirement and Don’t Need These Retirement Assets

If you are in a position where you are nearing retirement and do not need the funds for your retirement – then you may consider a Roth conversion in full or laddering the conversion over a period of time to avoid a heavy tax bill in one single year.

The benefits of the Roth conversion at this stage of life is more focused around the flexibility it provides to you and the next generation:

  1. A Traditional IRA mandates Required Minimum Distributions annually once you turn 72.
    • Roth IRAs do not. This allows for continued years of compounding tax free growth without the need to distribute funds.

  2. When you pass a Traditional IRA down to the next generation, when they withdraw the funds, they will be taxed upon distribution.
    • Roth IRA distributions will not be taxed to the next generation upon withdrawal.

Keep in Mind That One of the Biggest Determining Factors….

One of the biggest determining factors in choosing whether or not to convert your Traditional 401K/IRA to a Roth will be in your ability to pay the tax bill. The options above are attractive times to convert that potentially mitigate your tax liability – but do not eliminate the tax bill all together.

So no matter when you decide to convert – be sure to have mentally prepared for the tax associated with the conversion and that you have that liquid and readily available come tax time.

I am A Firm Believer in the Long Term Benefits of Tax Free Growth & Withdrawals

Which is exactly what the Roth provides. And I think it’s fair to say that none of us have any idea what the tax rates will be 25+ years from now . So for me, I’m willing to take a little bit of the tax burden today to benefit from the ease and peace of mind of tax free withdrawals later on in life.


Refer to a the past blog post: Why I Love the Roth IRA

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hey there, i want to introduce myself!

Thank you for being here - I'm Victoria!

I'm a financial advocate, coach, and blogger on a mission to help you build wealth with confidence! 

Having worked closely with countless clients over my 14 year career, I've gained a very deep understanding of money management and effective planning strategies in guiding individuals and families towards financial success. Now, I want to share that wealth of knowledge and insight to empower YOU to take control of their finances, make well-informed decisions, and create a life of abundance without the stress of finances looming over you. I'm so glad you're here! 

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