Money Matters Weekly: The Pros and Cons of a Roth Conversion

Korey Knepper |

As retirees navigate their financial landscape, one strategy often discussed is the Roth conversion. This financial maneuver involves transferring funds from a traditional IRA or 401(k) into a Roth IRA. While it can be a powerful tool for optimizing retirement income and tax planning, it's not without its drawbacks. Let's delve into the potential benefits and downsides of executing a Roth conversion in retirement.


  1. Tax Diversification: Roth conversions can enhance tax diversification in retirement. Traditional retirement accounts are subject to Required Minimum Distributions (RMDs) starting at age 73 (changing to 75 in 2033), which can increase taxable income. By converting a portion or all of traditional retirement assets into Roth accounts, retirees can potentially reduce or eliminate future RMDs and mitigate tax implications.

  2. Tax-Free Growth and Withdrawals: One of the most appealing features of Roth IRAs is their tax treatment. Unlike traditional retirement accounts, qualified distributions from Roth IRAs are tax-free. By converting to a Roth, retirees can enjoy tax-free growth on their investments and tax-free withdrawals in retirement, providing a valuable source of tax-efficient income.

  3. Estate Planning Benefits: Roth conversions can also offer estate planning advantages. Since Roth IRAs are not subject to RMDs during the account holder's lifetime, they can be passed on to heirs tax-free. This can be particularly advantageous for leaving a tax-free legacy to beneficiaries, as they can continue to enjoy tax-free growth and distributions over their lifetimes.


  1. Immediate Tax Liability: Perhaps the most significant downside of Roth conversions is the immediate tax liability. When funds are converted from a traditional IRA or 401(k) to a Roth IRA, the converted amount is subject to income tax in the year of the conversion. This can result in a substantial tax bill, potentially eroding the benefits of the conversion if not carefully planned for.

  2. Reduced Liquidity: Another consideration is the reduced liquidity of funds after a Roth conversion. Since taxes are paid upfront on the converted amount, retirees must use non-retirement funds to cover the tax bill. This can tie up liquidity and may not be feasible for retirees with limited outside assets.

  3. Market Volatility Risk: Roth conversions involve moving assets from a tax-deferred account into a taxable one. If the value of the converted assets declines after the conversion due to market volatility, retirees may end up paying taxes on a higher amount than the current value of their investments, reducing the overall benefits of the conversion.


Roth conversions can be a valuable tool for optimizing retirement income, tax planning, and estate planning. However, they require careful consideration and planning to maximize their benefits while mitigating potential downsides. Retirees should work closely with financial advisors to assess their individual circumstances, tax implications, and long-term financial goals before deciding whether a Roth conversion is right for them. With thoughtful planning, Roth conversions can unlock a world of tax-efficient income and financial flexibility in retirement. If you would like to discuss your plan with us, and see if a Roth conversion is right for you, use this link to schedule an initial consultation.

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