The Roth IRA is the best retirement account, say experts, but those without one can still convert an existing retirement account – a 401(k) or traditional IRA – to a Roth IRA and enjoy its benefits. With taxes poised to rise for many after the Trump tax cuts expire in 2025, it may make sense for many savers to consider a Roth IRA conversion while the tax situation is more advantageous.

Here’s why a Roth IRA conversion may make sense for you – and key pitfalls to watch out for.

How does a Roth conversion work and what are the benefits?

A Roth IRA lets workers save on an after-tax basis, invest tax-free and withdraw money tax-free in retirement. It’s the best retirement account out there, say the pros. But even if you don’t have a Roth IRA, you can take advantage of its benefits by converting an existing retirement account.

The key benefits of the Roth IRA include:

  • Tax-free compounding on your investment, potentially for decades
  • Ability to invest in high-return assets, such as stocks and stock funds
  • Tax-free withdrawals in retirement, defined as age 59 ½ and later
  • No required minimum distributions from the account, as with pre-tax accounts
  • No tax liabilities passed on to heirs

To convert a pre-tax 401(k) or traditional IRA to a Roth IRA can be somewhat complex, and it usually involves a significant tax bill. Because you’re converting retirement contributions that have never been taxed, you’ll need to pay taxes on money being converted into the Roth IRA.

“The immediate tax cost can be a shock since converted amounts are treated as taxable income, potentially catapulting you into a higher tax bracket for the year,” says Megan Slatter, Wealth Advisor at Crewe Advisors in Salt Lake City. But the costs can be managed somewhat.

“Spreading out conversions over several years can help manage tax impacts more effectively,” she says.

But why should workers convert their account to a Roth and take a tax hit today?

“If your tax bracket is lower today than in the future, the conversion could make sense,” says  Omar Qureshi, CIMA, CPWA, managing partner, Hightower Wealth Advisors in St. Louis.

“The prospect of increased tax rates in the future provides a strong incentive to consider Roth conversions now,” says Slatter.

A Roth conversion may make sense with tax rates set to rise

The Trump tax cuts are already scheduled to “sunset” at the end of 2025, unless Congress acts to extend them. If it doesn’t, tax rates would go back to the higher levels of 2017 and before.

“Unless Congress intervenes, individual tax brackets, estate taxes, and deductions could all undergo significant adjustments, generally resulting in higher tax liabilities for a range of income groups,” says Slatter.

Given a confluence of factors, tax rates may be set to rise, making a Roth conversion pricier.

“With out-of-control government spending, a growing deficit, and individual income tax rates at some of the lowest in our country’s history, I could easily make the argument that taxes will be higher in the future,” says Nicholas Yeomans, CFP, president of Yeomans Consulting Group.

“Right now retirees have an opportunity to ‘tax-shift’ their retirement accounts over the next year and a half to Roths,” he says.

By converting now and paying taxes at today’s relatively low rates, savers can permanently take that future tax burden off their plate – and even of those who might inherit their Roth IRA.

A conversion “allows you to not only pay tax at a lower rate than you would be in the future, it also reduces the balance in your IRA, so your required distributions are lower in the future, helping ease your tax bill,” says Qureshi.

It doesn’t have to be an all-or-nothing decision either. Savers can convert some of their account to a Roth IRA and leave some amount in pre-tax savings. That strategy allows savers to play both sides of the field, say experts.

“A Roth provides the retiree the option to take retirement income from this pool of money if tax rates are higher, and then choose to take distributions from before-tax retirement accounts when tax rates are lower,” says Yeomans, who emphasizes the value of choice for retirees.

Roth IRA conversion pitfalls to beware

Making a significant financial decision based on speculation about how the government may act in the future is fraught with problems, beyond just the complications of the conversion itself.

“Given the uncertainty surrounding tax changes, it’s probably not wise to enact a bunch of strategies on the fear that things may change, because they may not,” says Qureshi. “However, it’s always a good time to review planning strategies, such as Roth conversions. If a Roth conversion makes sense today, it will certainly make sense too” if the Trump tax cuts expire.

And actually converting the Roth can create issues, too, especially for those looking to tap their retirement funds in the short term. That’s because Roth IRAs have several “5-year rules” that require money to be in the account for a minimum period before it becomes tax-free.

“There are as many as three different 5-year rules to be aware of,” says Yeomans. “Not understanding these rules could trigger penalties and potentially blow up your Roth.”

Anyone doing a Roth conversion should also pay particular attention to the “pro rata rule,” too. This rule could cause a tax liability where you didn’t expect to see one.

Given these complications, it’s wise to speak with a financial advisor versed in these matters. A skilled advisor can help you understand whether a Roth conversion makes sense for your particular needs and then guide you through it so that you avoid unnecessary hassles and taxes.

“Seek wise counsel,” says Yeomans. “Work with your financial and tax advisor to determine the best strategy for you.”

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Bottom line

While a Roth conversion may make a lot of sense for you, you’ll want to run the numbers to see the benefits yourself. And with the potential for taxes to rise in 2026 and beyond, prudent savers should at least examine the potential benefits of this strategy to see if it works for them.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.