What is a Roth IRA conversion? Whiteboard Wealth #13

You may have heard of a Roth IRA conversion, but do you understand how it works and why you may want to explore doing a Roth IRA conversion? Since the Roth IRA was established in 1997 it’s become a fan favorite for investors and financial advisors alike! It’s completely tax-free nature (when used properly) means you can negate the risk of rising future tax rates and grow your retirement savings without any tax consequences.

The Roth IRA is so popular in fact the government created a way to transfer your IRA assets (which are generally taxable) into a Roth IRA. This process is called converting your IRA to a Roth IRA.


What is a Roth IRA conversion?

A Roth IRA conversion is the process of transferring money from your IRA to your Roth IRA while paying the appropriate taxes due. This allows you to effectively “pre-pay” your taxes now at current rates, then allowing your assets to grow tax free forever!

Whiteboard Wealth #13 is about the Roth IRA conversion. This quick video explains the process of converting your IRA to a Roth IRA, and also who it may be beneficial for and what those benefits are.


The important thing to remember about doing a Roth IRA conversion is the taxes due. You don’t want to pay the taxes from the IRA which is being converted. If you did that you’d end up with a smaller amount invested, and the goal would be to pre-pay your taxes from NON-retirement accounts. It’s best to do Roth IRA conversions and pay the taxes with only after-tax dollars – such as funds from a savings or taxable investment account.


Big benefits of the Roth IRA conversion

There are some pretty big benefits of doing a conversion:

  • Lowers your Required Minimum Distribution amount, and therefore your taxes after age 70 and 1/2
  • The Roth IRA doesn’t have any (Required Minimum Distribution) RMD requirements, so those monies can grow tax free forever and be passed to your beneficiaries
  • You can use Roth IRA monies in retirement to “smooth” your income taxes out by keeping IRA distributions and other taxable income just up to certain tax brackets and using Roth IRA for additional living expenses after that
  • The Roth IRA can be invested more aggressively because it’s generally one of the last sources of assets you’d tap in retirement, thus leaving it more time to stay invested
  • If tax rates rise even a slight bit, you’ve pre-payed those taxes at lower tax rates


There are other benefits but mostly hypothetical ones. You can’t predict future growth rates or tax rates, but the Roth IRA is a great planning tool to have. When in doubt, try to have both pre tax and Roth assets in retirement to draw from. It will lower your ultimate tax liability and help you manage your finances more effectively.