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Nearing Retirement? A Roth Conversion Could Be Your Silver Lining

Apr 03, 2020 3 min read Jim Mahaney

Key Takeaways

  • A Roth conversion could offer multiple tax benefits.
  • Converting could mean you’ll need to save less for retirement.
  • Weigh the benefits against the risks.



The dramatic downturn in the financial markets spurred by concerns about COVID-19 is reminiscent of the Great Recession of 2008. But we’ve learned some valuable lessons since then. Those close to retirement and watching their IRA or 401(k) values drop may have a silver lining.

There is a way to make up ground without trying to time the stock market and “buy low.” Converting your traditional IRA to a Roth IRA, or converting some or all of your 401(k) to a Roth (called an in-plan conversion), could be a solution — with significant tax benefits.


(Maybe lower) taxes now, tax-free withdrawals later

With either option, when you convert to a Roth, you will owe income taxes for the current year. That’s because your contributions were either tax deductible (IRA) or made with pretax dollars (401(k)), and earnings on your account have been tax deferred. That may be a near-term hit, but there’s a payoff: You won’t pay taxes on withdrawals in retirement.

Another plus: Because account values are lower due to the market meltdown, by converting now you might owe less current tax than you would otherwise. And since future investment growth on the Roth assets will escape taxation, the tax savings over your lifetime can be even more significant.

With a traditional IRA, you can convert all or just a portion of your account balance. (How much of your 401(k) you can covert depends on your plan’s rules.) Distributions from a Roth 401(k) are tax- and penalty-free if it’s been at least five years since your first Roth contribution and you’re at least age 59½.


The benefits of tax-free retirement income

Having tax-free income in retirement is attractive on its own. But the real benefit of having both Roth and traditional pretax accounts to pull from is that you can minimize the impact of taxes by withdrawing up to the top of a specific tax bracket each year. Also, you may be able to time withdrawals to avoid tax on Social Security benefits and/or keep your income low enough to minimize Medicare premiums.


Not everyone’s cup of tax

Even so, a conversion poses some risks. For example, if you convert, but your account value falls further by retirement, you’ll end up having paid taxes on a converted Roth value you never took into retirement. And even if your account grows, you could find yourself in a much lower tax bracket in retirement. So, talk to your tax advisor before you make a move.

What matters is having the right amount of after-tax income in your pocket each year of retirement. By converting some of your traditional IRA or pretax 401(k) assets — and “prepaying” taxes — now, you’ll need to save less for retirement overall.

While a Roth isn’t for everyone, for some it may be a silver lining in a down market.


What you can do now

If you have a traditional IRA and/or workplace retirement plan with a Roth option, ask your tax advisor if a Roth conversion makes sense for you. Review the benefits and risks. You might find a bright side to a dark financial picture.



Jim Mahaney is vice president for strategic initiatives at Prudential.


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