Converting a traditional IRA to a Roth IRA can create a tax bill right away, and that is the part many savers underestimate. Jean Chatzky said the basic rule is simple: do not convert unless you have cash from outside the IRA to pay the taxes.
That tax hit lands in the year of the conversion. TIAA said the amount moved from the traditional account is added directly to taxable income, and using money from the IRA itself to cover the bill can be costly. Chatzky warned that, depending on your tax bracket, pulling money from a tax-advantaged account to pay the taxes could cost well over 30% of every dollar.
For people weighing the move, the bracket math matters. Jonathan Fishburn, a wealth planning strategies director at TIAA, said moving from the 22% bracket into the 24% bracket may be acceptable, but jumping to the 32% bracket is a much bigger step. TIAA also said poorly timed conversions can raise Medicare premiums and increase the taxation of Social Security benefits, which can make a seemingly small move more expensive than it first appears.
The strategy is part of a broader debate over when to pay taxes on retirement savings. Chatzky said people often choose a traditional IRA when they expect their tax rate to be lower in the future, while a Roth IRA appeals to those who believe their taxes are lower now and likely to rise later. She said she personally believes taxes will go up overall, a view that helps explain why Roth conversions remain popular even when the upfront bill is painful.
TIAA said the best time to convert is often during lower-income years, such as when someone is between jobs, on a sabbatical or after retiring but before required minimum distributions begin. Major brokerages have also made the process easier, turning IRA conversions into a largely self-serve online transaction that usually does not require an advisor.
That convenience can obscure the traps. For high earners who exceed IRS income limits for direct Roth contributions, the backdoor Roth remains a common workaround. TIAA said the method involves making an after-tax contribution to a traditional IRA and then converting it to a Roth IRA, and because no deduction was taken on the contribution, tax is generally not owed on that amount when it is converted. But the company also warned that the pro-rata rule often comes with a trap door that catches people by surprise.
The warning is the same one advisers keep repeating for a reason: a Roth conversion can be useful, but only when the tax cost is clear, the timing is right and the rest of the retirement picture has been checked first.
