Roth Conversion.
In plain English
A Roth conversion takes money out of a traditional IRA or pre-tax 401(k) and puts it into a Roth, where it can grow and be withdrawn tax-free later. The catch is that the converted amount counts as taxable income in the year you do it. You are choosing to pay tax now in exchange for no tax later. People often convert in low-income years, such as early retirement before Social Security and pensions start, to lock in a lower tax rate on the move.
01Why it matters
Done in the right year, a conversion can shift money to tax-free status at a low rate. Done in a high-income year, it can push you into a higher bracket and cost more than it saves.
02The math, step by step
You retire at 60 with low income for a few years before Social Security starts. You convert $30,000 from your traditional IRA to a Roth and pay tax on that $30,000 at a low bracket now. From then on, that money and its growth come out tax-free, and it is no longer subject to future required minimum distributions.
03What this is NOT
It is not a tax-free rollover. Moving a 401(k) to a traditional IRA is a nontaxable rollover. A Roth conversion changes the tax character of the money from pre-tax to after-tax, so it creates a taxable event on purpose.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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