Things to Keep in Mind When Converting IRAs to Roth IRAs

If you believe your tax bracket will be higher in retirement, want to maximize what you leave behind for your heirs, or feel that your investments are not well diversified from a tax perspective, you can convert your IRA to a Roth IRA. A Roth IRA conversion can also make sense if you are having a lower-than-usual income year, since the tax impact of the conversion may be easier to manage.

A Roth IRA (Individual Retirement Account) conversion allows you to pay taxes now so you can make tax-free withdrawals later when you retire. Hence, one of its biggest appeals is the potential to reduce your taxable income during retirement. But while this benefit is attractive, it should not be the only reason you consider a Roth IRA conversion.

There are a number of Roth IRA conversion rules, immediate tax implications, and long-term considerations that you need to know. Let’s understand some of the most important things you need to know when you convert an IRA to a Roth IRA.

Below are some of the Roth IRA conversion rules you need to know:

1. The five-year rule applies to your contributions and conversions

If you are considering a Roth IRA conversion, the five-year rule is one of the most important factors. There are two different five-year rules. You need to see how each one applies, so you can avoid unexpected taxes or penalties. Let’s break this down step by step.

The earnings in a Roth IRA can only be withdrawn tax-free if at least five years have passed between January 1 of the tax year of your first Roth IRA contribution and the date you withdraw the earnings. For example, let’s say you made your first-ever Roth IRA contribution on April 10, 2026, but you applied it to the 2025 tax year. Under the five-year rule, the clock starts ticking on January 1, 2025, not April 2026. Your five-year period would end on January 1, 2030, and you could potentially withdraw earnings tax-free from that date onward, assuming you meet the other requirements.

However, if that same contribution had been applied to the 2026 tax year, your five-year clock would begin on January 1, 2026, and you would need to wait until January 1, 2031, to withdraw earnings tax-free.

Now you may be wondering what happens if you withdraw too early?

In this case, the Internal Revenue Service (IRS) will consider it a non-qualified distribution, and the earnings portion of your withdrawal may be subject to income tax, a 10% early withdrawal penalty, or, in some cases, both. Once the five-year rule is satisfied and you are age 59½ or older, your withdrawals or earnings are considered qualified distributions, and they are free from both taxes and penalties.

Does the five-year rule apply to all Roth IRAs?

Yes. The five-year requirement applies to all Roth IRAs you own, not to each account separately. Once you have satisfied the rule for your first Roth IRA, it carries forward to future Roth IRAs you open. In fact, this rule also applies to inherited Roth IRAs, based on when the original account holder made their first Roth contribution. So even beneficiaries need to be mindful of when the Roth IRA was first funded.

That said, even if the five-year rule is not met, you might still avoid penalties under certain circumstances. Common exceptions include:

• Reaching age 59½
• Death
• Disability

In these cases, you may still owe income tax on earnings, but the 10% penalty could be waived.

Moving on to the most important part of the five-year rule. You may not know it yet, but there is a separate five-year rule for Roth IRA conversions.

When you convert money from a traditional IRA to a Roth IRA, the IRS requires a five-year waiting period before you can withdraw the converted amount without penalty if you are under age 59½. If you withdraw converted funds too early, you may owe a 10% early withdrawal penalty on the converted amount, even though you already paid income tax on it at the time of conversion. The five-year waiting rule applies mainly to the converted principal, not to the earnings on that conversion. Earnings still fall under the standard Roth IRA rules and must meet both the five-year requirement.

There are exceptions to the penalty as well, including:

• Reaching age 59½
• Death
• Disability

Another important detail is that every Roth IRA conversion has its own separate five-year clock. If you do multiple conversions over different years, each one must independently meet its own five-year requirement. So, if you plan to do partial conversions over several years, you will need to be a bit more careful about the penalty.

2. You can convert an IRA to a Roth IRA, but you may not be able to contribute

These are two completely different rules. As long as you are willing to pay taxes on the converted amount, almost anyone can convert a traditional IRA, or other eligible retirement assets, into a Roth IRA. It does not matter how high your income is. There are no income limits on Roth IRA conversions. So even if you earn too much to make a direct Roth IRA contribution, you can still move money into a Roth IRA through a conversion. However, while conversions are open to almost everyone, Roth IRA contributions are limited by your Modified Adjusted Gross Income (MAGI).

These limits vary by filing status. For the year 2026, these are the limits you need to follow:

So, remember, the contributions depend on your income, but the conversions do not. Having said that, just because you are not making new Roth IRA contributions does not mean you can’t benefit from a Roth IRA altogether. Speak to a financial advisor about this and find out if a conversion makes sense for your financial situation and needs.

3. There will be some Roth IRA conversion tax implications

When you convert a traditional IRA to a Roth IRA, you will owe taxes on the amount you convert. This applies to any money in the traditional IRA that has not already been taxed.

What exactly gets taxed during a conversion?

The taxable portion usually includes all tax-deductible contributions you made to your traditional IRA and the earnings that have grown tax-deferred over the years. When you convert, the IRS treats this amount as ordinary income for that year. It gets added to your total taxable income and is taxed at your current income tax rate. So, if you convert a large amount in a single year, you could push yourself into a higher tax bracket.

Understand that if you are choosing a Roth IRA conversion, you are essentially agreeing to pay taxes now so that you can enjoy tax-free withdrawals later, including tax-free growth in retirement. For people who expect to be in a higher tax bracket in retirement, the conversion can be a useful strategy, for sure. But it only works well if you can foot the tax bill today.

And, the 5-year rule still applies. If you convert money and then withdraw the converted amount too early, you could face a 10% early withdrawal penalty, even though you already paid taxes on the conversion.

Questions to ask yourself before you consider a Roth IRA conversion

1. Do you have enough money to consider a Roth IRA conversion?

A Roth conversion is not free. While you do not have to pay any fee for it, you will need to pay tax on the amount you convert. Ideally, this tax should come from money outside your IRA. If you dip into your retirement account to pay the tax, you would reduce the amount that actually goes into the Roth, which in turn limits how much can grow tax-free over time. If you end up pulling out money early from your retirement account for a conversion, it could shorten your investment time horizon and reduce the power of compounding.

There is another thing to watch out for. If you are under 59½ and use IRA funds to pay the conversion tax, the amount withheld can trigger a 10% early withdrawal penalty. So, make sure you evaluate your financial liquidity. A Roth IRA conversion will only work to your advantage when you have enough surplus cash to cover the tax bill without touching your retirement savings. If not, you may be on the losing end in the future.

2. Do you plan to leave your Roth IRA to charity?

In short:

• If you plan to give money to charity, a Roth IRA conversion may not be the best thing for you.
• If you have a large estate and you plan to leave your IRA to your family, a Roth conversion may help reduce future taxes.

Let’s elaborate on this:

If you intend to leave assets to a qualified charity, doing a Roth conversion may actually work against you. Charities do not pay income tax on retirement accounts. This means that if you leave a traditional IRA or 401(k) directly to a charity, the charity receives the full amount, and no tax is ever paid on that money.

In this case, converting that account to a Roth first may not make sense, because you would be paying tax now on money that could have passed to the charity completely tax-free. So, if charity is part of your estate plan, it is often better to leave pre-tax retirement accounts to charities and save Roth accounts for family members.

If you do not plan to leave money to charity and your estate is very large, a Roth conversion can still be useful. When you convert to a Roth IRA, you pay tax today. That tax payment reduces the total value of your estate. This can help lower future estate taxes for your heirs.

3. When to convert IRA to Roth?

Here’s when:

• You may want to consider converting when you have extra cash available to pay the taxes.
• Being in a lower tax bracket is another good time to convert, so you pay lower taxes.
• A Roth conversion also works best when you know your retirement and estate plans. If you understand how much income you will need in retirement and who will eventually inherit your assets, you can better judge Roth IRA conversion tax implications for you or your heirs in the future.
• If most of your retirement savings are in traditional, pre-tax accounts, converting some portion to a Roth can help lower your taxes in the future.
• You can also convert if your MAGI falls within Roth IRA contribution rules.

Making Roth IRA conversions work for you

You can convert an IRA to a Roth IRA successfully, as long as you understand the rules and know what to expect down the road. But keep in mind that the tax implications are very real. It is equally important to look at your overall retirement strategy. The conversion should align with your long-term needs, not work against them. So, spend some time getting to know the Roth IRA conversion rules, such as the five-year rule, MAGI limits on contributions, and more.

If any part of the process feels confusing, you may use our advisor directory to connect with a qualified financial advisor who can help with the conversion.

Frequently Asked Questions (FAQs) about the Roth IRA conversion

1. How much can you contribute to a Roth IRA?

In 2026, you can contribute up to $7,500 if you are under age 50. If you are age 50 or older, the limit increases to $8,600. Keep in mind that contribution limits depend on your income.

2. Is it important to have a financial advisor by your side when converting?

It is not mandatory, but it can make the process much smoother. A financial advisor can help you understand the tax impact and plan the timing of the conversion. You are likely to make fewer mistakes with a professional by your side.

3. Can you convert from a 401(k) to a Roth IRA?

Yes, you can convert a 401(k) to a Roth IRA if you want tax-free withdrawals in retirement.

4. When is the right time to convert to a Roth IRA?

The right time is usually when you are in a lower tax bracket than you expect to be in the future. Converting during a low-income year allows you to pay less tax. Another good time to consider a conversion is when you have surplus funds available to pay the conversion tax upfront, rather than dipping into your retirement savings.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As an SEC-registered investment advisor (RIA) firm, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management based on a solid, proven research approach. Additionally, each client receives comprehensive financial planning to help them move toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.