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Almost every retirement move is sold as a way to lower this year's tax bill. A Roth conversion does the opposite, on purpose.
You take pre-tax retirement money, pay tax on it now, and park it where qualified withdrawals come out tax free later. For some owners that is smart. For others it is an expensive mistake that cannot be reversed. The rules decide which one you are, so let's read them.
Educational content, not financial, tax, legal or investment advice. Talk to a licensed professional about your situation.
What is a Roth conversion?
A conversion is a transfer from a pre-tax account to a Roth IRA. The IRS lists three ways to do it: a rollover, a trustee-to-trustee transfer, or a transfer within the same trustee.1
The key sentence from the IRS: a conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA.1 You report it on Form 8606, and the IRS counts SEP IRAs and SIMPLE IRAs among the sources you can convert from.1
If you want the basics of the account itself first, start with Roth IRA basics for founders. This piece assumes you know why people like a tax-free withdrawal and want to understand the cost of getting there.
- Pre-tax moneyTraditional, SEP or SIMPLE IRA
- You convertMoved into a Roth IRA
- Tax is dueUntaxed amounts count as income that year
- Money growsInside the Roth, with market risk
- Qualified withdrawalTax free if both rules are met
What are the three rules that catch people?
You cannot undo it
Before 2018, an owner who regretted a conversion could reverse it. That door closed:
A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized.
Treat a conversion as permanent. If the market falls the week after, the tax bill on the old value still stands, and that is the risk people forget when a screen shows a big balance.
There are two five-year clocks
For a withdrawal to be qualified, it must come after the five-tax-year period that starts with the first year you made any Roth contribution, and also meet an age or other condition, such as reaching 59 and a half.2
A separate five-year period applies to each conversion for purposes of the 10% additional tax on early distributions.2 If you are young enough that it matters, keep a record of every conversion date.
Your other IRAs count too
Form 8606 totals the value of all your traditional IRAs at year end, including traditional SEP and SIMPLE IRAs, as part of the calculation.3 If you hold a SEP IRA from a prior year, that balance is part of the picture whenever you convert something else.
That is why a conversion is not a stand-alone decision. It interacts with the plan you opened, and it belongs in the conversation with the Solo 401(k) vs SEP IRA choice.
When might a conversion make sense?
Only when you believe your tax cost today is lower than your tax cost later, or when the flexibility itself is worth it. Nobody knows the future tax rules, so this is a judgment, not a formula.
| Conversion may look better when | Conversion may look worse when |
|---|---|
| Your income this year is unusually low | Your income is high this year |
| You have cash outside the IRA to pay the tax | The tax would have to come from the converted money |
| You expect higher income in the future | You expect lower income in retirement |
| You want tax-free money with no required distributions | You may need the money soon |
The lumpy-income angle
Owners have uneven years. A slow year after a big one is the classic moment someone brings up conversions, because taxable income is lower than usual. It is also a year you may need your cash. Look at both before you decide.
Watch the other income-based items
A conversion raises your income for the year. HealthCare.gov bases Marketplace savings on your estimated net income for the year you get coverage,6 so a conversion can ripple into premiums. Model your health plan too, not just your tax return.
How is a conversion different from a Roth contribution?
A Roth IRA contribution is limited. For 2025, the IRA limit is $7,000, or $8,000 if you are 50 or older, and eligibility phases out for single filers between $150,000 and $165,000 and for married couples filing jointly between $236,000 and $246,000.4
A conversion moves existing pre-tax money, so the contribution caps do not set its size. Ask your tax professional how that works for your situation.
If the bigger question for you is how to split new savings between Roth and pre-tax, The Money Guy Show covered it in a video posted on January 27, 2025.
VideoThe Money Guy Show
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Brian Preston and Bo Hanson answer a viewer's Roth versus traditional question; general education only, so run your own numbers with a professional.
The Roth option inside a business plan
A Roth 401(k) feature has no income limit to participate.5 If your plan document allows it, a Solo 401(k) can take Roth deferrals up to the employee deferral limit of $23,500 for 2025.4
Roth IRAs have no required minimum distributions for the original owner.2 That flexibility is why this account keeps coming up.
Who should skip this entirely?
Anyone who cannot answer three questions: where the tax money comes from, what happens to income-based items this year, and why a Roth beats the alternatives for them. If those answers are fuzzy, the safest conversion is the one you did not make yet.
Some owners will do nothing, and that is a valid result of the analysis. The goal of running the numbers is a decision you understand, not a conversion for its own sake.
What mistakes do owners make?
- Paying the tax from the converted money. It shrinks the amount that lands in the Roth. Ask your CPA how to pay.
- Converting before the cash is set. Fill your reserves first. A conversion that forces you to sell or borrow is not a win.
- Converting in a December rush. Run numbers in October, not on the last week.
- Forgetting state tax. Ask how your state treats conversions and include it in the model.
- Losing the paper trail. Keep the Form 8606 and a note of the date.
What should you do before year end?
- List every IRA you own. Include old SEP and rollover accounts.
- Estimate this year's taxable income. Use your real profit, not a guess.
- Ask for scenarios. Have your CPA model converting nothing, a small amount and a larger amount.
- Check the knock-on effects. Estimated taxes and health insurance subsidies.
- Write down the five-year dates. First Roth contribution year and each conversion.
My grandmother never asked about my tax bracket. She asked, So what's your retirement plan? Conversions are one tool that serves the answer, not the answer itself.
A conversion is a tax bill with a purpose. If you cannot name the purpose, wait.
The rest of the series on accounts, cash and insurance is in Investing and Retirement.
Keep building.Ekai
Questions people ask
What is a Roth conversion?
It is a move of money from a traditional IRA, SEP IRA or SIMPLE IRA into a Roth IRA. The IRS says a conversion results in taxation of any untaxed amounts in the traditional IRA, and it is reported on Form 8606.
Can I undo a Roth conversion?
No. The IRS says a Roth IRA conversion made on or after January 1, 2018 cannot be recharacterized.
Is there a five-year rule on conversions?
Yes, two of them. A distribution is qualified only after a five-tax-year period that starts with your first Roth contribution. Separately, each conversion has its own five-year period for the 10% additional tax on early distributions.
Can I convert a SEP IRA?
The IRS treats SEP IRAs like traditional IRAs for conversion purposes, and Form 8606 combines all traditional, SEP and SIMPLE IRAs when it figures the taxable part.
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