What Is a Roth Conversion — And How Can You Do It Wrong?

Roth conversions sound smart. Tax-free growth, tax-free withdrawals later, more flexibility in retirement — what’s not to like? Well… the tax bill today. That part. In this episode, Shari Rash, founder of GWA Wealth, breaks down what a Roth conversion actually is, how it works, and why “tax-free later” does not mean “free today.” A Roth conversion can be a powerful planning tool, but it can also backfire if you convert too much, do it in the wrong year, ignore the pro-rata rule, forget about Medicare premiums or other income-based thresholds, or assume you can undo it later. Shari explains the difference between a Roth contribution, a Roth conversion, and a backdoor Roth, why the conversion amount usually gets added to your taxable income for the year, and why a large pre-tax retirement balance usually means you need a better plan — not a bigger conversion. You’ll hear: What a Roth conversion is and how it differs from a Roth contribution Why the conversion amount is not the tax bill, but may be taxable income How converting too much in one year can create a bigger tax bill than expected Why the pro-rata rule can make a backdoor Roth less clean than it sounds Why outside cash to pay the taxes matters How Medicare premiums, five-year rules, and tax brackets can affect the decision Why Roth conversions should come from a projection, not a podcast-induced burst of motivation The biggest takeaway: do not hear “Roth conversion” and think, “I should do that.” Hear “Roth conversion” and think, “This is something worth analyzing.” This episode is for educational and informational purposes only and is not individualized financial, investment, tax, legal, or accounting advice. Before making decisions about Roth conversions, retirement accounts, taxes, or investments, talk with a qualified financial professional or tax professional who understands your full situation. If you want help building a financial plan that connects your income, taxes, retirement accounts, investments, and long-term goals, visit ⁠GWA Wealth⁠ to explore your next step. Follow Everyone’s Talkin’ Money on your favorite podcast app so you never miss an episode, and keep the conversation going on Instagram @everyonestalkinmoney⁠ If you’re ready for personalized, judgment-free financial guidance, learn more about working with Shari. Shari Rash is the founder of GWA Wealth⁠⁠ a virtual advisory firm helping women make confident, values-aligned decisions with their money. Talkin’ Points → where your money gets smarter. Real talk, practical tips, zero guilt straight to your inbox. Sign up here. Be sure to like and follow the show on your favorite podcast app! Shari Rash is a financial planner and Investment Adviser Representative of GWA Wealth, a Registered Investment Adviser. The information provided in this podcast is for educational and informational purposes only and should not be construed as personalized investment, tax, or legal advice. Listening to this podcast does not create an advisory relationship with Shari Rash or GWA Wealth. All investments involve risk, including the potential loss of principal. Any references to specific investments, strategies, or securities are for illustrative purposes only and are not recommendations. You should consult your own financial advisor, tax professional, or attorney regarding your individual situation before making any financial decisions. Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:00Speaker 00

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• 1:14Speaker 04

  Roths have this almost magical reputation in personal finance. You get tax-free growth, tax-free withdrawals, as long as you follow the rules, and no future tax bill on your money. And it sounds amazing. And honestly, Roth money can be incredibly powerful.

• 1:41Speaker 04

  I love talking about Roths with my clients, but here's where people get into trouble. They hear "tax-free later" or "tax-free", but somehow their brain skips over the part where you owe taxes now, potentially, in order to create this Roth, this tax-free growth and withdrawals. So today, we're talking about Roth conversions and also backdoor Roths. You hear about them a lot, and I'm going to dive into what they are, why people do them, when they make sense, how you can absolutely do them wrong. Because a Roth conversion is not just shuffling around

• 2:26Speaker 04

  your retirement accounts. It's a taxable event. And if you do it without understanding the bigger picture, you could accidentally create a bigger tax bill, trigger higher Medicare premiums, mess with financial aid planning, or convert money in a year where it may make no sense to do so. So Roth conversions sound really smart. Backdoor Roths sound really smart, and they can be, but they are not automatically smart no matter what. A Roth conversion is a tax strategy, not a trend. So the question is not, should everyone do Roth conversions?

• 3:09Speaker 04

  The question is, does this make sense for your tax picture, your timeline, and your future income? And stay with me because later in the episode, I'm going to give you the Roth conversion gut check, the questions I want you to ask before you move $1 from pre-tax to Roth. Welcome back to Everyone's Talkin Money. I'm Shari Rash, founder of GWA Wealth. And after almost 20 years in personal finance, working with women who are doing well on paper, but still don't feel fully in control of their money, I can tell you this. Some of the most expensive mistakes happen when people take a strategy that sounds smart

• 3:52Speaker 04

  and apply it without asking whether it fits their actual life. I did an episode about this a few weeks ago, about stop taking investment advice from podcasts or media, because there's a lot of things that sound really good out there and a lot of really smart people that are telling you about it. But it doesn't mean carte blanche it works or is appropriate for everyone. And Roth conversions are no different. They can be fantastic, but they could also be completely wrong for the year you are in, the tax bracket you are in, the cash flow you have, or the goals you are trying to protect. So today, we're going to break down in plain English

• 4:35Speaker 04

  what a Roth conversion is, how it works, why people use it, and the mistakes to avoid. And a quick disclosure before we dive in, this episode is for educational and informational purposes only. It is not individualized financial, investment, tax, legal, or accounting advice. Before making decisions about Roth conversions, retirement accounts, taxes, or investments, talk with a qualified financial professional or tax professional who understands your full situation.

• 5:08Speaker 04

  So here's the first thing I want you to understand. A Roth conversion is not the same thing as a Roth contribution. A Roth contribution is when you put new money into a Roth IRA or Roth 401K, which are also subject to contribution limits and eligibility rules. A Roth conversion is when you move money that is usually sitting in a pre-tax retirement account, like a traditional IRA or a pre-tax 401K, and you move it into a Roth account. And when you move pre-tax money into a Roth, you usually pay taxes on the converted amount in the year of the conversion.

• 5:54Speaker 04

  So for 2026, IRA contribution limits are $7,500 or $8,600 if you're 50 and older. So $7,500 if you're 49 and younger, $8,600 if 50 or older. And that distinction matters. A contribution is putting new money in. A conversion is changing the tax treatment of money that is already in a retirement account. Now, a question I get is, well, can I contribute both $7,500 to an IRA and a Roth IRA? And the answer is no, you may not. It's one or the other, or if you want to do a combination of both,

• 6:39Speaker 04

  you still have the limit of $7,500 or $8,600.

• 6:46Speaker 04

  A Roth conversion is not free money. It is choosing to pay taxes now in exchange for the possibility of more flexibility later.

• 6:59Speaker 04

  Now, let's talk about why someone would intentionally choose to pay taxes now than later. Because, yeah, it it sounds kind of crazy. Why would I choose to pay taxes now when I don't necessarily have to? If you are single, head of household or married filing separately, you you can contribute fully to a Roth IRA in 2026 if your modified adjusted gross income is under 153,000. You cannot contribute at all to a Roth if your modified adjusted gross income is 168,000 or more. In between that 153 and that 168,

• 7:41Speaker 04

  you could do a phase out contribution or a partial. So again, if you are under 153,000 as far as your modified adjusted gross income, and that is like when you file your taxes, what you're telling the government you're making, that's not like, oh, I make 200,000 a year, so I can't contribute to a Roth. Maybe you could. It all depends on what you're reporting to the government, what your taxes are after your deductions and all of that stuff. So again, a Magi, M A G I, modified adjusted gross income above 168,000, you cannot directly contribute to a Roth. Married filing jointly,

• 8:24Speaker 04

  you can contribute to a Roth fully if your modified adjusted gross income is under 242,000. You cannot contribute at all if your modified adjusted gross income is 252,000 and above. In between that 242 and 252, that's where you may be able to do a partial or phase out contribution. And that's where conversions become very attractive to people if their modified adjusted gross income is above those limits. So a Roth conversion is not just like free money. What you're doing is you're choosing to pay taxes now in exchange for the possibility of more tax flexibility later.

• 9:11Speaker 04

  So why would someone intentionally choose to pay taxes sooner? Because if you have money and you don't owe taxes on it for a long time, why would I choose to pay taxes on that money now? Once you understand the strategy, it may make a lot of sense for you. So a Roth conversion is when you move money from a traditional pre-tax retirement account into a Roth account. So you are taking money that would normally be taxed later when you withdraw it, and you are choosing to pay the taxes now on that money. So the money can potentially grow and come out tax-free later.

• 9:54Speaker 04

  Again, assuming you follow the Roth rules. Everything I say with tax-free, delaying taxes, all of that, it all comes with the big asterix of assuming you are following the rules of your Roth. So you can convert a traditional IRA, an individual retirement account, to Roth. You can convert a SEP IRA or a simple IRA, depending on the rules or timing. You can convert your pre-tax 401K if the plan allows it, or you may be able to roll over that money, then convert it to a Roth. So you can, those are very common sources

• 10:38Speaker 04

  that start, that provide the pre-tax dollars that are then going to be converted to Roth. And when you convert it, it's essentially going one of two, one of two places. A Roth IRA or a Roth 401K. But that's dependent on the plan rules. So any amount of money you convert pre-tax is generally taxable income that year. So it gets added right on top of your ordinary income. So your earned income for that year, anything you get, you convert, adds right on top of it, and you pay ordinary income tax on that money.

• 11:19Speaker 04

  But then after you convert it, the money then moves into your Roth and gets the Roth treatment and future withdrawals may be tax free again, as long as you follow the rules. So it's kind of like moving money from a, from the pay taxes later bucket into the pay taxes now, potentially, probably, likely going to be tax free later bucket. So pay taxes later into tax free later on. So, but you, again, you're paying the taxes this year. So when I find that when I'm working with people and they present, well, I've heard about this Roth conversion and it sounds great. Yes, it can be great.

• 12:04Speaker 04

  Hey, by the way, you could end up paying taxes on this $100,000, which could end up creating a $30,000 tax bill. And that's where like, eh, maybe that it sounds great, but maybe I'm not going to do that. So that's where it's very important to consider. Again, if we're converting $100,000, you're not paying $100,000 in taxes. It means that the $100,000 is included as taxable income and taxed based on your situation.

• 12:38Speaker 04

  And why people choose to do a Roth conversion is they think their tax rate is lower now than it may be later. So if you believe your tax rate today is lower than what it may be in the future, converting some money now may make sense. If you haven't really hit your stride as far as income earning, like if you have a lot of upside in your job or your career, so you're like, I'm going to be making more money in the future. I like the idea of the Roth. Why don't I do this now? That may be create a little bit of urgency to want you to do the Roth so you can pay the taxes now when you're in a lower tax rate.

• 13:23Speaker 04

  Tax rates also are historically low right now. They may not feel that way, but they are. So tax rates are lower right now than what they could potentially can be in the future. Obviously, when, when it, when it comes to a lot of things, but especially taxes, when you're at the bottom, there's only one way to go. And right now, we're at, if not pretty close to the bottom. So it is reasonable to expect your tax rate's going to be higher in the future. Even if your income stays the same, it is potentially, it is completely reasonable, in my opinion, to expect you're going to have a higher tax rate in the future.

• 14:00Speaker 04

  You may be pausing your career right now to take care of loved ones where you don't have as much income. You may be running a business right now and, and your business income's lower. You could be starting a new, a new business. So you're still ramping up and so your income's lower right now. So it, it, there are times where you can use this strategically to your advantage. So instead of just being like, woe is me, my income's low right now. Okay, my income's low right now. What can I do to help future self and, and potentially pay less taxes in the future? So what can I do to take advantage of this situation?

• 14:43Speaker 04

  Reason number two, you want tax diversification in retirement. When I'm working with my clients, it, I, I just had this conversation a little bit ago this morning of required minimum distributions. So my clients have saved into retirement. They saved into their 403Bs and 401Ks and it's all pre-tax money. It's all money you've not yet paid taxes on. Your pre-tax retirement accounts, they're, they're a good tax tool in the year you're, you're contributing because it reduces your taxable income. Then they really just have a big IOU on it for, to the government.

• 15:23Speaker 04

  So having all of your money in pre-tax accounts creates less flexibility because my clients are getting at the age of required minimum distributions. And required minimum distributions are required distributions that the government makes you take from your retirement accounts. And whether you want to or not, whether you like it or not, you have to make those distributions. And

• 15:51Speaker 04

  That's a tax bill. They're doing it so they can get their tax revenue back. So you're gonna pay taxes on that. And if you think tax rates are going to be higher in the future, then a Roth conversion today or while tax rates are lower may make sense for you. But the tax diversification allows you to have more control over what money you're going to use when in retirement. Roth gives you just another bucket to pull from. And the buckets could be a taxable brokerage account, pre-tax retirement, Roth retirement, or cash.

• 16:31Speaker 04

  So you can kind of design what your tax bills could look like with the different types of dollars that you have in retirement. So tax diversification in retirement, I think, is super important because it just gives you more control. Reason number three, they want to reduce future required minimum distribution. So the idea of the government telling you, hey, you have to withdraw X amount of money from your account. When you turn, right now it's 73, whether you like it or not, a lot of people don't like that idea. So RMDs, generally speaking, don't apply when it comes to Roths.

• 17:14Speaker 04

  So by converting now, that's less money the government is going to force you to withdraw in the future. Reason number four, estate planning flexibility. So Roth assets may be attractive for heirs. There are still rules around liquidating the account for heirs. But if an heir receives Roth assets, that's generally a tax-free receiving of assets. So that's, that's pretty sweet. Reason number five, they want more control over the future taxable income. So again, like, like how I mentioned in reasons two and three,

• 17:55Speaker 04

  the flexibility, the tax diversification, reducing future required minimum distributions. A Roth conversion is often less about saving taxes this year and more about creating tax flexibility over many years. Because

• 18:16Speaker 04

  When we're putting money pre-tax into our 401k, we're thinking about reducing our taxes today. When we're contributing to Roths or doing backdoor Roths, we're just thinking about, again, this year, oh, I have to pay taxes on this money this year. Well, overall, you're going to pay less taxes if you convert to Roth now, generally speaking, because your pre-tax money is going to keep growing, growing, growing. And you're going to pay taxes when you make the withdrawal. So if you have $100,000 worth of pre-tax contributions and it grows to a million,

• 19:01Speaker 04

  that's $900,000 worth of money you need to pay taxes on. If you do a $100,000 Roth conversion now, you pay the $30,000 or so in taxes, and then it grows tax-free and withdrawn tax-free. So it's giving you more control over your taxable income. And that, again, creates flexibility and freedom and diversification when it comes to investing is so important, but also to what types of dollars you hold. Diversification is so important. So if you're listening to this and thinking, okay, I understand the concept, but I've no idea whether this makes sense for me.

• 19:44Speaker 04

  This is exactly where personalized planning matters because Roth conversions do not happen in isolation. They connect to your income, your tax bracket, your retirement accounts, your cash flow, your investments, your future retirement income, your estate plan, and sometimes even Medicare premiums. And that's the work I do through GWA Wealth. At GWA Wealth, I help women who are doing well on paper build clear, personalized financial plans so they can stop guessing and start making confident decisions with their money. You can learn more at GWAWealth.com or through the link in the show notes. Because Roth conversions are not something you do because they sounded smart on the internet.

• 20:29Speaker 04

  You do it because it makes sense for your actual life.

• 20:34Speaker 04

  So now let's talk about how people mess up Roth conversions. Mistake number one, converting too much in one year. The first way people get Roth conversions wrong is converting too much at once. They look at the large traditional or large old 401k balance and think, I'm going to start moving this to Roth. I like the idea. I want this tax-free money in the future. So they start converting it. The beauty of the conversion is that you don't have to do it all at once. It is not an all or nothing. The amount, again, as I've mentioned before, the amount you convert generally gets added to your taxable income for that year.

• 21:14Speaker 04

  So if you already have salary, business income, investment income, pension income, social security income, rental income, whatever, then you add a Roth conversion on top of it, you may create a much bigger tax bill than you expected, which then could push more of your income into a higher tax bracket. It could make a normal tax year suddenly very expensive. More retirement money does not mean convert more. It just means let's plan more carefully. A partial multi-year conversion strategy may be better than one huge conversion. Because let's use an example.

• 21:56Speaker 04

  Let's say someone has a large traditional IRA. They left their employer. They have about 200,000 in their 401k and they're rolling it to a traditional IRA. But they decide instead to convert the 200,000 to Roth because they heard the Roth money is better. But they also had $250,000 of income in that year. The conversion is not off in its own little tax bubble. It stacks right on top of the income they already have. So now they may have created a $450,000 income year before looking at deductions, state taxes, all of that. They created a really big taxable income for themselves.

• 22:39Speaker 04

  It doesn't mean it's bad, but it does mean that their tax bill may be bigger than expected. And You need to have that cash in order to pay the taxes. So your accountant will say to you, hey, here are the taxes due for this year and you have to pay it. It's not as if, oh, taxes due, it's kind of floating out there. No, you then have to write a check to Uncle Sam in order to pay for this conversion. So instead of thinking, how much can I move? It should, the conversation would be, how much can I afford to move and convert? Because remember, again, you have to pay the tax bill.

• 23:24Speaker 04

  Mistake number two, not understanding the bracket filing. So one way advisors often think about Roth conversions is bracket filing. That means instead of randomly choosing a conversion amount, you look at your projected taxable income and ask, how much room do we have left in your tax bracket? Before we move into another bracket we don't want to enter. For example, again, maybe we don't convert the full 200,000. Maybe the plan is just to convert enough to fill the 24% bracket, or just enough to avoid pushing into the 32% bracket. Because think about it, if you end up bumping up into the 32% bracket

• 24:08Speaker 04

  as a result of your conversion, you're paying a lot of taxes. And yes, in the long run, after your money grows for a decade or two, could it still be less that you paid taxes upfront than than over the lifetime of the account, once you start making withdrawals? Yes, 100% totally still feasible. But if we have the opportunity to pay 24% tax on something versus 32%, I'm going to say most people are going to choose the 24%. So again, fill up the tax bracket at whatever gap you have, based on your modified adjusted gross income.

• 24:48Speaker 04

  However, much leeway you have between the Magi and your, the new income bracket, that's what we do, you can do when you fill, fill it up and you're only converting that amount.

• 25:02Speaker 04

  So the goal is to convert the right amount at the right time. If you are pro conversion and you like the idea and you are comfortable with, "Okay, I understand I'm going to have a tax bill to Uncle Sam when I go through this process." You're going to get your Roth money converted. It may take a few years, but if that's your goal, you're going to achieve it. But let's not pay more taxes than necessary in order to achieve this goal. Roth conversions are absolutely a tax bracket decision. The account matters, the year, excuse me, the amount matters, the year matters, your state taxes matter, and other income considerations may matter too.

• 25:41Speaker 04

  So there is a little bit of a pain today to pay those taxes today or next year or do some planning and spread it out over the next few years in order to achieve this tax-free goal. Mistake number three is thinking the backdoor Roth is always clean and tax-free. I've been talking about taking pre-tax money like that you've accumulated in old 401Ks or old IRAs and converting it to Roth. Another strategy is about a backdoor Roth that you contribute to a traditional IRA because you make too much money to contribute directly to the Roth,

• 26:25Speaker 04

  and then you convert the contribution to a Roth each year. So you can contribute your $7,500 if you're less than 50 to a traditional IRA, and then you convert it to Roth. And you think, "Well, I'm contributing with after-tax money. It's staying in cash. I convert it to Roth. Boom, that's tax-free."

• 26:54Speaker 04

  And yes, sometimes it is, but other times it is not. And it is not if you ignore the prorata rule. The prorata rule says that if you have both after-tax and pre-tax IRA money, you do not get to choose to convert only the after-tax dollars. So if you contributed to an IRA with after-tax dollars and you also have an IRA lingering elsewhere from that's pre-tax from like an old 401K, the IRS is saying you can't just choose to convert that 7,500

• 27:36Speaker 04

  that you contributed pre-tax and not pay taxes on that. The IRS looks at all of your traditional IRA, SEP IRA, and simple IRA balances together. And then you may have a taxable event, even if you like didn't expect it or you weren't planning on it. So let's use a simple example. Let's say you make your $7,500 nondeductible contribution to a traditional IRA because you want to do the backdoor Roth. But you also have $93,000 sitting in an old rollover IRA from a previous employer. Now, your total IRA pool is $100,500

• 28:22Speaker 04

  because it's 7,500 plus the 93,000. Only 7,500 of that is after-tax money. The other 93,000 is pre-tax money. So if you convert 7,000 to Roth, the IRS does not treat that whole $7,000 as tax-free.

• 28:44Speaker 04

  Instead, only about 7% of that conversion is tax-free and 93% of it may be taxable. So instead of this like nice, clean, tax-free conversion, which is like the way most people's brains work is like, well, I'm contributing this amount of money to be converted, so I'm only going to pay taxes on this, but since it's tax-free money, I'm not going to pay taxes. Not so fast. The IRS did what, did, did think a step ahead of us for this one. And you're actually creating an unexpected tax bill. So you're actually paying double taxes on that, on 93, in this case, 93% of your $7,500,

• 29:29Speaker 04

  you're actually going to pay taxes on that again, because it's looking at all of your, the amount of assets you're converting as a whole, not just that bit of money you intended to convert. The backdoor Roth is not the problem. So it's, it's still a good strategy. It's just, you have to be aware that doing a backdoor Roth while pretending like you have other, by, by pretending like your other IRA balances don't exist, is it going to work?

• 30:00Speaker 00

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• 30:32Speaker 04

  Mistake number four, paying the tax from your retirement account. So we, we, we convert our Roth and we have a tax bill due. Another mistake is converting money to Roth and then using the retirement account itself to pay the tax bill. Ideally, if you're going to do a Roth conversion, you want cash outside of your retirement account to pay the taxes.

• 30:59Speaker 04

  Why? Because if you do, if you use your retirement account to pay the taxes, less money over time makes it into the Roth. It reduces the long-term benefit of the conversion because you're just reducing your retirement money by the tax amount anyway. So it's less money working for you. Um, and depending on your age and situation, using retirement money to cover taxes may create additional tax or penalty issues. So if you convert money and then have to withdraw or pull from your retirement account to cover the taxes, you may reduce the whole benefit of the conversion.

• 31:42Speaker 04

  A Roth conversion usually works better when you have outside cash available to pay that tax bill.

• 31:50Speaker 04

  We don't want to create these conversions and then create a tax flow problem for yourself. So again, working backwards, so we have to look at our tax bracket, right? Working backwards of, well, how much can I fit into my tax bracket in order to convert? But then you'll also look at, well, how much cash do I have on hand to pay the taxes of the conversion? How much am I willing to write a check to the government for, for this Roth conversion? Another issue, mistake number five, forgetting about Medicare credits, deductions, and other income-based thresholds. A Roth conversion can increase your income for the year, and it may affect other things that are tied to this income.

• 32:35Speaker 04

  So for people near Medicare age or already on Medicare, a conversion can potentially affect your Medicare premiums. A conversion may affect deductions, credits, or other income-based thresholds. And higher income can have ripple effects. So the conversion itself may be a smart move, but you need to understand the side effects of the conversion. So if you're near Medicare age or already on Medicare, this matters because a Roth conversion can increase your income for the year, and that may potentially increase Medicare premiums later on. So for some of you, it may not just be what tax bracket I'm in.

• 33:18Speaker 04

  It could be what else changes if my income goes up this year. Sometimes a Roth conversion tax bill is not the only bill you need to think about. Mistake number six is ignoring the five-year rule. Another mistake is forgetting that Roth accounts are not being aware that Roth accounts have five-year rules. These rules are not always intuitive and they can differ whether we're talking about contributions, conversions, earnings, Roth IRAs, Roth 401Ks. So there are rules around when Roth money can come out tax-free or penalty-free. So if your plan is to convert your money to Roth and then immediately start using it, I would suggest not going that route.

• 34:04Speaker 04

  One, it takes time to actually, for your account to redeem itself from the tax hit that it took. And also, there's a five-year cooling-off period that after you convert money or contribute to a Roth, you have five years for it to cool off before you can actually withdraw it tax-free. So in general, whether it's a Roth conversion or contribution, don't have your plan B to contribute or convert and immediately start using the money. You need to have at least a five-year runway in order for the rules all to be followed and ensure that it truly is tax-free money you're withdrawing.

• 34:47Speaker 04

  Mistake number seven, thinking you can undo it later. So you cannot just reverse a Roth contribution later because you changed your mind, the market dropped, or the tax rule changed. So you need to run the numbers before you convert. So you can't just like dabble in it and say, ah, okay, oops, I did too much, let me reverse it. Once the conversion's done, undoing it may not be an option. Mistake number eight, doing it without coordinating your CPA and financial advisor or planner. So the final mistake is doing all of this in a silo. Your financial planner and CPA should not be strangers.

• 35:31Speaker 04

  A Roth conversion touches investments, retirement accounts, tax brackets, cash flow, future income, and sometimes estate planning. So this is a team sport. This is a team decision. You want to get your professionals coordinated. Your advisor or planner can help you with long-term planning and investment strategy. Your CPA can help project the tax impact. And both need to understand what is being converted and why. The mistake is moving money before running a projection and working with your professionals. Rules like the pro-rata rule are exactly why these strategies need to be planned before money starts moving. The mistake is not wanting Roth money.

• 36:15Speaker 04

  The mistake is assuming the path to Roth is much cleaner than it actually is and without checking the rest of your accounts first. A Roth conversion should come from a projection, not a podcast-induced burst of motivation. So when are Roth conversions worth exploring? First scenario, a lower income year. This could be a career break, a business dip, a sabbatical, a job transition, a year you get divorced, or another year where your income's unusually low. If your income's lower than usual, you may have room to convert some of your pre-tax retirement money at a lower cost than you might have in a higher income year.

• 36:57Speaker 04

  Scenario two, early retirement before required minimum distributions. There can be a planning window after someone retires, but before RMDs, required minimum distributions begin, where their taxable income may be lower. That could sometimes be a good time to explore partial Roth conversions.

• 37:18Speaker 04

  Scenario three, large pre-tax retirement balances. If you have a lot of money in pre-tax retirement accounts, future required minimum distributions could eventually create a bigger taxable income problem. Roth conversions may help create more tax flexibility, but again, this usually needs to be a multi-year strategy. Scenario four of when a Roth conversion may be worth exploring. You have cash outside of retirement to pay the tax. This is important because a Roth conversion may be attractive if you have cash outside the retirement account to pay the tax bill. So then your converted money can stay invested in the Roth.

• 38:01Speaker 04

  Yes, it's painful to write that tax bill to Uncle Sam, but if you have that money there waiting for you, it might help to take a little bit of the pain away. Scenario five, you want more tax diversification.

• 38:17Speaker 04

  Tax diversification means you do not have all of your future retirement income coming from one tax bucket. You might have some taxable money, some pre-tax retirement money, some Roth money and some cash. And that gives you flexibility later. And that flexibility is often something people don't plan for. Sometimes it happens by mistake, but plan for flexibility. We want things to be flexible, especially in retirement. Scenario number six, a market downturn or lower account value can create a great opportunity for Roth conversion. Yeah, it sucks, the market's down, you lost 20% of your portfolio. That's a beautiful time to convert

• 39:01Speaker 04

  because you're converting the same amount of shares, but it's worth less dollars and you pay less tax. So instead of, well, what was me, my portfolio's down, say, I'm going to take advantage of this and convert some of this money to Roth while the balance is low.

• 39:20Speaker 04

  Again, Roth conversions are not usually one dramatic move. It is often a thoughtful multi-year plan. So before you even think about converting money to Roth, here are questions I want you to ask. This is your Roth conversion gut check. What tax bracket am I in this year? What tax bracket might I be in later? How much could I convert before pushing into a tax bracket or threshold? I don't want to intentionally enter. Do I have cash outside the retirement account to pay the tax? Do I have any traditional IRA, SEP IRA, or simple IRA balances anywhere? If I am doing the backdoor Roth,

• 40:02Speaker 04

  do I understand how much of the conversion will actually be taxable? Have I made any non-deductible IRA contributions that need to be tracked? Will this conversion affect Medicare premiums, financial aid, deductions, credits, or anything else I have income-based? How long can this money stay invested before I actually need to use it? Am I doing this for a real reason or because I heard Roth is always better? Have my financial planner and tax professional reviewed the numbers together? Do not hear Roth conversion and think, "I should do that." Hear Roth conversion and think, "This is something worth looking into." Here's what I want you to remember.

• 40:46Speaker 04

  Roth conversions can be powerful. They can create tax flexibility. They can help future taxable retirement income. They can help build a bucket of money that may be tax-free later. But they are not automatically right for everyone, and they are definitely not free. The whole idea is that you choose to pay taxes now in exchange for flexibility later, which can be smart. It can also backfire if you convert too much, do it in the wrong year, ignore the prorata rule, you don't have the cash to pay the tax, you misunderstand the five-year rule, or treat it like a one-size-fits-all strategy. So please, do not hear Roth conversion and think, "I should do that." Hear

• 41:29Speaker 04

  Roth conversion and think this is something worth looking into. And if you want help building a financial plan that connects your income, taxes, retirement accounts, investments and long-term goals, you can learn more about working with me at GWawealth.com or through the link in the show notes. Be sure to follow the show on your favorite podcast app so you never miss an episode and leave me a quick rating and review because it helps more people find these conversations. And come keep the conversation going on Instagram with me at Everyone's Talkin Money. Remember, money should not be something that makes you feel confused, behind, or caught off guard. Money should be a tool to help you live life on your terms.

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