Roth Conversion

A Roth conversion is the act of moving pre-tax retirement funds (from a Traditional IRA, Traditional 401(k), or similar pre-tax account) into a Roth IRA. The converted amount is added to your taxable income for the year and taxed at your ordinary income rate. After conversion, the money grows tax-free and qualified withdrawals in retirement are not taxed.

When rolling over a 401(k) after leaving a job, you face a choice: roll to a Traditional IRA (no current tax, deferred until withdrawal) or roll to a Roth IRA (pay tax now, tax-free forever). The right answer depends on your current tax bracket, your expected retirement tax bracket, your timeline, and whether you can pay the conversion tax from outside the retirement account.

A partial conversion — converting only a portion each year — is often optimal. By converting just enough to fill your current tax bracket without pushing into the next bracket, you spread the tax bill over multiple years and keep the total tax cost lower.

A Roth conversion adds ordinary income in the year you convert. On its own, that rarely triggers the Alternative Minimum Tax (AMT) — AMT is driven by preference items like incentive-stock-option exercises, not ordinary income. The real single-year costs of a large conversion are bracket creep (part of the conversion taxed in a higher bracket), higher Medicare premiums two years later (IRMAA), and the 3.8% Net Investment Income Tax if your income crosses the threshold. The nesthelm modeling tools estimate these for your specific income level.

If you have a mix of pre-tax and after-tax IRA balances, be aware of the pro-rata rule: conversions are taxed proportionally based on the ratio of pre-tax to total IRA balance. You cannot selectively convert only the after-tax portion without triggering tax on the pre-tax portion.