March 18, 2023

3 Roth Conversion Strategies That Should Be Avoided

Stewart Willis

Having a Roth IRA is a great opportunity to maximize your retirement accounts. However, some Roth conversion strategies should be avoided to make certain you get the full benefit of a Roth IRA. 

What Is a Back-door Roth Conversion Strategy?

A back-door Roth IRA is an advanced Roth conversion strategy to help individuals, usually high-income earners, to contribute to a Roth IRA, as Investopedia explains. This works because income limits would prohibit them from making direct contributions otherwise. 

There are three ways a Roth conversion can be done:

  • Rollover: You take a distribution from your traditional IRA and deposit it into a Roth IRA within 60 days. If this is not done within the time limit, you can face a 10% penalty if you are over the age of 59 ½.
  • Trustee-to-Trustee transfer: You direct your financial institution to make a conversion to a Roth account in another financial institution.
  • Same-Trustee transfer: You direct your financial institution to make a conversion to another account they have for you.

Pursuing a traditional IRA to Roth conversion strategy or a 401k to Roth IRA conversion strategy helps you reap the benefits of a Roth IRA, such as:

  • No required minimum withdrawals (RMDs)
  • Tax-free withdrawals if you are 59 ½ or older
  • Earnings grow tax-free
  • Heirs can enjoy income tax-free withdrawals

While there is no contribution limit, you can only make a rollover once per year. The pro rata rule also applies to determine how much of your conversion is subject to taxes.

Roth Conversion Strategies to Avoid

Here are some Roth conversion strategies to avoid:

1. Converting All of Your Tax-Deferred Savings at Once

When looking to convert a traditional IRA to a Roth IRA, it can be tempting to get it over and done with. You might think it would save time to make one big conversion, but this isn’t the case. This can be detrimental to your tax bill. 

While you technically can roll over all of your tax-deferred savings, this would move some of your income into a higher tax bracket. You have more to pay in taxes that year. Being in a higher tax bracket could also make you ineligible for some Social Security benefits you might want. 

To avoid the hefty tax burden of moving all of your pre-tax funds at once, space them out over some time. Making several conversions over the years to your Roth IRA is a better Roth conversion strategy. Whenever possible, you can convert more when your taxable income is lower. 

Making a conversion when your tax bracket is lower is a great Roth conversion strategy for a retired person over the age of 65, because this will lower the taxes you pay on the dollar amount.

2. Making Conversions when the Stock Market is Up

If you have a traditional IRA including shares in a stock that is doing well, you might think that converting it to a Roth IRA would allow you to reap the benefits of it with little to no downside. However, this isn’t the case for this Roth conversion strategy. You will still end up paying a hefty tax bill because your shares have increased in value. 

On the other hand, if you have shares that aren’t performing well, you can convert them to a Roth IRA. This Roth conversion strategy will help you to capitalize on the current low value. Since you have these shares, you would expect them to rise in value later. It is much more valuable for you to pay a lower tax bill on them now with a Roth conversion. In the future, you can enjoy tax-free withdrawals when they have a much higher value.

3. Making Withdrawals without Considering the 5-Year Rule

Using a back-door Roth conversion strategy is helpful financially if you know the rules and limitations that come with a converted Roth IRA. Non-converted funds can be withdrawn without taxes or penalty fees at any time. 

This is not the case with converted funds in a Roth IRA. You will need to wait for five years before you can make a withdrawal on converted funds to avoid a 10% percent early withdrawal penalty. This applies if you are under 59 ½ years old. If you anticipate needing to make withdrawals in less than five years, consider another option that may be more suitable for you.

The Right Roth Conversion Strategy for You

Retirement planning depends heavily on your unique situation and needs. Let our seasoned professionals, fiduciaries who have a legal duty to manage your assets for your benefit, help you to make the most out of your retirement accounts for a secure future.

Call the Pros at Asset Preservation Wealth & Tax

A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.   

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to and search by our firm name or by our CRD # 175083.

Ready To Get Started?

You spent all your working years accumulating this wealth. Now it’s the time to make the most of it.