What Is a Roth Conversion?

Roth conversions are one of the most powerful tax planning strategies available to retirees. By paying taxes now at today's known tax rates, you can create a pool of tax-free retirement income that is not subject to Required Minimum Distributions (RMDs), not counted in the calculation that determines Social Security taxation, and not included in income for Medicare IRMAA surcharges.

The strategy is particularly effective during lower-income years — such as early retirement before Social Security and RMDs begin — when you may be in a lower tax bracket than you will be later. For Arizona residents, the state's 2.5% flat income tax makes conversions less expensive at the state level than in most other states.

The mechanics: You request your IRA custodian to convert some or all of your traditional IRA to a Roth IRA. The converted amount is added to your taxable income for that year.

Tax impact: The converted amount is taxed as ordinary income at your marginal tax rate. For example, converting $50,000 while in the 22% federal bracket costs approximately $11,000 in federal tax plus $1,250 in Arizona state tax (2.5%).

The 5-year rule: Each Roth conversion has its own 5-year clock before earnings can be withdrawn tax-free and penalty-free (if you're under 59½). After age 59½, converted principal can be withdrawn immediately without penalty.

No income limits: Unlike Roth IRA contributions, there are no income restrictions on conversions. High earners who cannot contribute directly to a Roth IRA can convert unlimited amounts.

Partial conversions: You don't have to convert everything at once. Many advisors recommend annual partial conversions to manage the tax bracket impact — converting enough each year to 'fill up' a target tax bracket without pushing into the next one.

Irreversible: Since 2018 (Tax Cuts and Jobs Act), Roth conversions cannot be reversed or 'recharacterized.' Once converted, you've committed to paying the tax.

Arizona is one of the best states in the country for Roth conversions. The 2.5% flat income tax means conversions cost far less at the state level than in states like California (up to 13.3%), New York (up to 10.9%), or Minnesota (up to 9.85%). Retirees who relocated to Arizona from high-tax states have a window to convert at Arizona's low rate — an opportunity that should be evaluated as part of any comprehensive retirement plan.