Roth Conversions: Considerations Before Converting And Why Not To Convert

We at High Falls Advisors have been and will continue to recommend that many IRA owners consider converting at least a portion of their traditional IRAs to a Roth IRA. A major reason for converting is to take advantage of our current lower tax rates. In 2026, tax rates are going back to what they were in 2017. This was part of the Tax Cuts and Jobs Act (TCJA) that was passed in December 2017. A good way to think about this is that tax rates are “on sale” between now (2023) and 2025. This is an opportunity to save taxes because tax rates, if nothing changes, will be going up. We believe that there is potential for taxes to go even higher beyond the sunset of TCJA.

You may find this blog topic unusual, because it discusses reasons why a Roth IRA conversion may NOT be right for you and some factors that you should consider before converting.

1. The Up-Front Tax Bill. During these uncertain times, you may need the money and feel you just can’t write the check for up-front costs. Once the conversion takes place, there is no going back; remember, you are locking in the tax bill at conversion. With the current market condition, it may make sense to wait until the year end to convert. If you convert $10,000 in May, the conversion might be worth only $8,000 at year end, but you will pay tax on the full $10,000.
2. Tax Rates. A fundamental principle of tax planning is to always pay taxes at the lowest rates. If you will be in a lower tax bracket in retirement, it may make sense to avoid a Roth conversion now; however, be sure that you truly will be in a lower tax bracket. Always remember that when you reach a certain age (73 or 75 depending on when you were born), there are required minimum distributions from your retirement accounts that can add to your tax bill. In addition, if you are married, your survivor will be subject to the widow’s penalty. This can be a big surprise when the first spouse dies and the survivor becomes a single taxpayer. If the survivor inherits all your IRAs, they get almost the same income but at close to double the tax rate of married filing joint.
3. Beneficiary’s Tax Rates. It is good to know the tax rates or potential tax rates of your beneficiaries. It may be less than your own tax rate so it may not make sense to convert.
4. Side Effects of Roth Conversions: Stealth Taxes. Converting traditional IRAs to a Roth IRA increases your adjusted gross income (AGI). Some deductions are based on AGI. If the AGI is higher, some potential deductions could be reduced or even lost. Other effects of higher income can impact medical deductions, child tax credits, taxation of Social Security, and education credits. Increased income can also increase Medicare premiums. These are usually short-term blips, but it is good to be aware of these before converting.
5. Financial Aid. Financial Aid may be impacted by a spike in income from a Roth conversion. Roth conversions cause your income to increase, which may restrict Financial Aid eligibility. It may make sense to wait on Roth conversions until assistance is no longer needed.
6. When Will You Need the Money? If you need to access Roth funds sooner rather than later, a conversion may not make sense. The tax cost may not be worth the benefit if the funds won’t have time to grow. The big Roth benefit comes through tax-free compounding over time.
7.  Where Will the Money to Pay the Tax Come From? It is best to pay the tax from assets outside of an IRA. This way the whole amount you convert becomes income tax free from the conversion date. If you pay the tax from your IRA, you convert less of your IRA. For example: Suppose you are in the 24% Federal and 6% state tax brackets (total 30% tax). If you convert $100,000 with taxes paid from outside funds, the whole $100,000 gets converted. If you pay the tax from the IRA, only $70,000 is actually converted, but you are still paying tax on $100,000.
8.  Subject to RMDs. Generally, taxpayers who are currently taking their RMDs may decide not to convert or to convert a smaller amount. Your required minimum distribution cannot be converted to a Roth IRA. The conversion amount can only be completed after the RMD is satisfied. If a taxpayer decides to still convert, they might consider converting an amount that will fill up their current tax bracket but avoid going into the next bracket. Some tax brackets represent a large jump (i.e., the next bracket after 24% is 32%).
9. QCD Effect. If you plan to use your IRA to donate to charities either during lifetime or after death it may not make sense to convert all or some of your IRAs. If you are 70 ½ or older, you may be using your traditional IRA to donate to your favorite charities. You can donate up to $100,000 and the distribution is not taxable and can be used to satisfy your RMD. Also, if your charities are named as beneficiaries of your IRA, that distribution will be tax-free to the charity. If you plan to name charities and individual beneficiaries, you may wish to only convert the part that you intend to leave to the non-charity beneficiaries.
10. Expected Large Future Medical Expenses. If you expect large out-of-pocket medical expenses, you could use traditional IRA funds and employ the medical expense deduction to offset or lower the tax. If you need to use IRA funds for a deductible expense, such as medical, the value of the Roth conversion is minimized.

The whole goal of Roth conversion in an increasing tax bracket environment is to pay as little in income tax as possible. In future posts, look for reasons you should convert and take advantage of the current “on sale” tax rates.