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What is a Roth Conversion?

What is a Roth Conversion?

A Roth conversion is simply moving funds from an IRA to a Roth IRA.   All the account owner needs to do is complete a form, sign and submit it, and pay the tax.   A traditional or rollover IRA is a taxable account, providing the owner making the contribution a tax deduction to defer taxation.  A Roth IRA is an untaxed account, but funded with after tax dollars, thus not offering tax deductibility. 

As an example, let’s say Linda has $100,000 in a Rollover IRA.  Linda would like to move the account balance to Roth IRA registration over the course of two years.  Linda decides to convert half the account balance in year 1, approximately $50,000.  The $50,000 is added to Linda’s income for the given tax year when the conversion occurs (January 1-December 31).  In this example we will assume the $50,000 is taxed at Linda’s marginal tax bracket of 22%, meaning Linda has to come up with $11,000 to pay the IRS.  Linda has two options: 

  1. Linda can have the conversion process itself account for the tax bill,  sending $11,000 directly to the IRS and $39,000 to the Roth IRA.
  2. Or Linda can pay the $11,000 out of her checking/savings account, and then the Roth IRA is funded with $50,000.  If Linda has the cash to pay the tax, this is a preferred option.  

At the end of two years, Linda now has $100,000 in a Roth IRA, or $100,000 less the tax bill in her new account.   Depending on your state of residence and tax filing, tax income taxes come into play.  Some states tax retirement distributions, some don’t.  Illinois, as an example, does not (currently) tax retirement distributions. 

The merits of a Roth Conversion depend on the specific situation.  What is my current tax rate?  What is my expected tax rate in future years?  Are taxes going up at the federal level?  How does my state of residence tax retirement distributions?  What percentage of my balance sheet is held in taxable accounts?  How will it effect taxation of my Social Security?   Is it better done when I am young, or when retired?  And on and on……

A Roth Conversion can be a powerful piece within a well-designed holistic financial plan, when the situation fits.  Roth IRAs are terrific account registrations, offering different and contrasting benefits when compared to traditional or rollover IRAs. If you are looking to address some or all of these questions and evaluate the merits of a Roth Conversion for you, our team at Optimal Wealth & Investment would enjoy the opportunity to help educate and evaluate.  This type of decision can be complex, often times not knowing with certainty the best decision.  The benefits and tax consequences need to be properly evaluated, knowing the range of outcomes.  Once this is known, a reasonable person can make a fully informed decision.   This might include implementing a Roth Conversion. 

Please reach out via our "contact us" form, an email, or a phone call to schedule a consultation.


Adam Chaney
Certified Financial Planner, CFP®
Chartered Retirement Planning CounselorSM (CRPC®)
Accredited Portfolio Management AdvisorSM (APMA®) 

Investing involves risk including loss of principal.
Securities & Advisory Services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.  Optimal Wealth & Investments and LPL Financial are separate entities.  

If considering a Roth conversion, it is important to consult with your financial advisor, tax planner, accountant, and/or other qualified professional to fully understand the benefits and consequences of such.