By Jamie Johnson, WCI ContributorA Roth conversion involves moving assets from a different retirement account into your Roth IRA. Since a Roth IRA is funded with after-tax dollars, a Roth conversion might make sense if you believe your tax bracket will be higher in retirement than it is at the moment you're thinking about making the conversion. High earners who aren’t eligible to contribute directly to an IRA will often use a Roth conversion as a “backdoor” contribution since it allows you to sidestep the IRS’s income limits.
Whatever your reasons for doing a Roth conversion, there are tax implications to consider first. Let’s look at how to pay your estimated taxes on a Roth conversion and how to determine whether it’s worth it, given your financial situation.
What Are the Tax Implications of a Roth Conversion?
If you do a Roth conversion, you’ll owe taxes on the entire amount you convert during the year you made the switch. The exact amount will depend on your tax bracket and income tax rate, but it will range between 10%-37%.
Any money you convert is included in your gross income for the year. If you’re in a high income bracket, this can be a significant amount of money, so it’s smart to weigh the tax consequences before taking action.
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Why Wealthy Charitable People Should Not Do Roth Conversions
How to Calculate Your Estimated Taxes
Here’s an example of how you would calculate your estimated taxes on a Roth conversion. Let’s say you’re a 45-year-old individual earning $120,000 per year, and you want to move $50,000 into your Roth IRA. If you’re a single taxpayer, that puts you in the 24% federal tax bracket, which means your federal tax liability is $12,000.
However, unless you live in one of the seven states with no income taxes, you may owe additional money to the state. Some states tax Roth conversions as ordinary income and some don’t, so you’ll have to research the laws in your state.
It’s also important to consider whether the Roth conversion will push you into a higher tax bracket. For example, let’s say you make $120,000 per year and want to move $70,000 into your Roth IRA. After the Roth conversion, your gross annual income is $190,000, which moves you from the 24% tax bracket up to 32%. This changes the amount you’ll owe since some of the funds will be taxed at the higher rate.
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Is a Roth Conversion Worth It?
Given the potential tax liability, you may wonder if a Roth conversion is really worth it. The answer is maybe, depending on your current financial situation and goals. For example, if you’re getting close to retirement, a Roth conversion probably won’t benefit you as much. It’s also not a great idea for anyone receiving Social Security or Medicare benefits. If the Roth conversion increases your taxable income, your Social Security taxes will increase, and your Medicare costs could rise.
But if you’re currently in a low tax bracket and believe your taxes will be much higher when you retire, it could be a good move. And since you’ll need to pay taxes for the year you complete the conversion, you also need to consider your cash flow and ability to make the payment.
Before moving forward with a Roth conversion, it’s a good idea to calculate your break-even point. Vanguard offers this Roth conversion calculator to calculate your break-even point and potential asset growth if you move the funds over.
There’s no one-size-fits-all solution when it comes to investing, and many different factors determine whether the future benefits outweigh the costs. If you’re on the fence, it may be a good idea to reach out to a tax professional who can help you make an informed decision.
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
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Why is this article’s title not what the article is even about?
You mean like adding a paragraph about EFTPS?
If performing a Roth conversion and using cash when paying the taxes, how do you actually make the tax payment? Is it recommended to send an estimated tax payment using Form 1040-ES for the amount you will owe and in the quarter in which the conversion was made? For example if a Roth conversion was done now in March 2025 should this payment be made by April 15th, 2025? Or can this tax be paid when filing ordinary taxes next April 2026? Thank you.
You can do an estimated payment, have more withheld from your paycheck, or send a check in with your tax return. Be aware of the safe harbor rules or you may have a bit of penalty to pay too. It’s supposed to be a pay as you go system, so if it’s a big Roth conversion, better make an estimated payment.
Peter and John reflect what was expected from the title which is exactly my question. Following on John’s example, if I am retired and have no income except some dividend and interest income, and want to convert $150K in March, the question is, How to Pay Estimated Taxes on a Roth Conversion? I earned about that much last year in W2 income. This year I have none. Safe harbor doesn’t really hold here. I won’t “make” more than last year, but I also won’t “pay as I go” through W2. Is “better make”, need to make in 1Q estimated payment?
If you do a conversion in March, the IRS wants it paid in your estimated payment April 15th. If you don’t, there’s a decent chance you’ll get a penalty (which is hardly the end of the world.)