Definition
A Roth conversion moves pre-tax retirement funds to a Roth IRA, triggering immediate income tax on the converted amount. The benefit: future growth and withdrawals are tax-free. Conversions are advantageous when current tax rates are lower than expected future rates, during low-income years, or when tax rates are expected to rise. There is no income limit for conversions.
lightbulb Example
An investor converts $50,000 from a traditional IRA to Roth during a low-income year (12% bracket). Tax cost = $6,000. Over 20 years at 8%, the $50K grows to $233K—all withdrawals are tax-free, saving $46,600+ in future taxes at 20%.
verified_user Key Points
- Pay taxes now for tax-free future growth
- Advantageous in low-income/low-tax-rate years
- No income limits for conversions
- Backdoor Roth: contribute to traditional, then convert