Every year, December 31st sneaks up on people. And every year, one of the best tax tools available to retirees and soon-to-be retirees goes unused by most of them. That tool is the Roth conversion.
A Roth conversion has a hard deadline. If you want it to count for this tax year, it has to be done by December 31st. There is no extension and no “I’ll file it in April” option like there is with some IRA contributions.
In this post, we’ll walk through five reasons this year could be a good year to do a Roth conversion, especially if you’ve never done one before. We’ll keep it simple, use real numbers, and show you how each reason works in practice. If you’re a Washington state employee with money in the DCP, a Plan 3 account, or an IRA, this one is for you.
First, what is a Roth conversion?
Most retirement savings sit in pre-tax accounts. Think of your DCP, the investment side of your PERS 3, TRS 3, or SERS 3 account, a 403(b), or a traditional IRA. You got a tax break when you put the money in. The catch is that the IRS gets its share later. Every dollar you take out in retirement gets taxed as income.
A Roth account works the other way around. You pay the tax first. After that, the money grows tax-free, and qualified withdrawals come out tax-free too.
A Roth conversion is moving money from a pre-tax account into a Roth account. When you do it, the amount you move counts as taxable income for that year. You pay the tax now so you never have to pay tax on that money (or its growth) again.
Here’s an easy way to picture it. A pre-tax account is like a farm where the government owns a slice of every harvest, forever. A Roth conversion is buying back the government’s slice of the seeds today, so every future harvest is all yours.
Reason 1: Roth conversions are still available
This first reason sounds almost too simple, but it matters. Roth conversions haven’t always been open to everyone. The rule that let anyone convert, no matter how much they earned, only took effect in 2010. Before that, higher earners were shut out.
Back then, if you wanted money out of your IRA, you had to pay income tax on it and then put whatever was left into a regular investment account. From there, you’d owe capital gains tax on growth and tax on any dividends the account paid out every year. That’s a lot of tax drag.
In the big picture, the open Roth conversion is still fairly new. And what Congress gives, Congress can take away. Nobody knows if or when lawmakers might limit or remove this option. While the door is open, it makes sense to at least look at whether walking through it is right for you.
Reason 2: Your age, and why sooner beats later
The whole point of a Roth is tax-free growth. The longer the money sits there and grows, the more tax-free growth you get. Time is the engine.
You may have heard the saying “time in the market beats timing the market.” It’s true. People who put money in and leave it alone usually do better than people who keep jumping to cash and back in, trying to guess the next move. The market is too hard to predict. Staying invested tends to give better long-term results.
The same idea applies to a Roth. The younger you are when you convert, the more years that money has to compound tax-free during your lifetime. And if you leave the account to your kids or other heirs, they can benefit from that tax-free growth too.
Here’s the part people forget: today is the youngest you’ll ever be again. Waiting a few years to “think about it” shortens the clock. Starting now gets that clock running.
A quick picture of time and growth
Say you convert $20,000 and it grows at an average of 6% a year. Here’s roughly what it could look like over time. These are rounded, simple examples, not a promise of returns.
| Years in the Roth | Approximate value | Tax-free growth |
|---|---|---|
| 10 years | $35,800 | $15,800 |
| 20 years | $64,100 | $44,100 |
| 30 years | $114,900 | $94,900 |
Every extra decade adds a lot more tax-free growth than the one before it. That’s why the age reason is so strong.
Reason 3: Roth accounts grow tax-free
Once money is in a Roth, the growth is yours to keep. The IRS can’t touch it. If your Roth goes from $2,000 to $4,000, that $2,000 of growth is 100% yours.
That kind of tax-free growth doesn’t exist anywhere else. Look at the other places your money can live:
- A regular investment (brokerage) account: you owe capital gains tax when you sell at a profit, plus tax on dividends.
- A pre-tax account like the DCP, Plan 3, 403(b), or traditional IRA: every dollar you take out is taxed as income.
- A Roth account: qualified withdrawals, growth included, come out tax-free.
The tax-free part alone is the main reason most people end up doing Roth conversions. It turns a “taxable later” bucket into a “never taxed again” bucket.
One small rule to know: to get tax-free withdrawals of earnings, you generally need to be at least 59½ and meet the Roth five-year rule. Each conversion also has its own five-year clock for penalty purposes if you’re under 59½. This is one more reason getting started earlier helps.
Reason 4: A down market can be a good time to convert
This one sounds strange at first. When the video was recorded in 2022, the market was down more than 20%. Most people feel like hiding when that happens. But a down market is one of the better times to do a Roth conversion.
Here’s why. When prices are low, you’re moving investments into the Roth at a lower value, so you pay tax on a smaller number. Then, when the market comes back, all of that recovery happens inside the Roth. That growth comes back tax-free instead of being taxable later in your IRA.
The worked example
Say you had $10,000 in your IRA at the start of the year. The market dropped, and now it’s worth $8,000. Let’s assume you’re paying 20% in taxes on whatever you convert.
| Convert at the start of the year | Convert after the drop | |
|---|---|---|
| Number of shares | 10 | 10 |
| Value converted | $10,000 | $8,000 |
| Tax at 20% | $2,000 | $1,600 |
| Value if the market recovers | $10,000 | $10,000 |
| Tax saved | – | $400 |
Don’t get too hung up on the dollars. What really matters is shares. In both cases you own the same 10 shares. The only thing that changed is what those shares were worth on the day you converted.
You pay tax on the dollar value when you convert. If the shares later climb back to where they started, your Roth goes from $8,000 back to $10,000, and that $2,000 rebound is tax-free. Because you converted while prices were down, you saved yourself $400 in taxes.
So the silver lining of a rough year in the market is that it often makes a good year for Roth conversions. If you see a big drop before December 31st, that’s a signal to at least run the numbers.
Reason 5: A Roth is tax insurance for your retirement
Think of a Roth as insurance against future tax increases. Here’s the problem it solves.
Say you leave your money in the DCP, your Plan 3, or an IRA, and it doubles over the next 10 years. Your tax bill on that money doubles too. That’s if nothing changes. If tax rates go up on top of that, what you owe could grow by even more, maybe 150% or 200%, depending on where rates end up.
How the tax bill grows with your account
Here’s a simple example using a $100,000 pre-tax balance that doubles to $200,000. The rates are only for illustration.
| Scenario | Balance taxed | Tax rate | Tax owed |
|---|---|---|---|
| Convert today | $100,000 | 22% | $22,000 |
| Wait 10 years, same rates | $200,000 | 22% | $44,000 |
| Wait 10 years, rates go up | $200,000 | 25% | $50,000 |
By converting, you protect yourself from the unknown. You pay the devil you know today. Your account is still going to grow over time, because that’s what markets tend to do. If you think taxes might go up, and given where rates are today there’s a decent chance of that, you’re likely to come out ahead by biting the bullet at your current rate.
The hidden taxes in retirement
Federal income tax is only part of the story. A Roth also shields you from two “hidden” costs that hit a lot of retirees: taxes on your Social Security benefits and higher Medicare Part B premiums. Both are tied to your income in retirement.
Social Security taxes. Social Security uses its own formula, but the basic idea is this: the more pre-tax or earned income you have on top of your benefits, the more of your Social Security becomes taxable. Money you take out of a Roth doesn’t raise your adjusted gross income. That means it doesn’t push more of your Social Security into the taxable column.
Medicare Part B premiums. This one isn’t technically a tax, but it works like one. Everyone pays for Medicare Part B. If your income crosses certain levels in retirement, though, you pay more. The levels depend on whether you file single or married. Cross a threshold by even one dollar, and both you and your spouse pay higher premiums for a full year.
Now picture this. You did Roth conversions early in retirement. Later, you want a big chunk of money for something fun, like a dream vacation. You could pull $10,000, $20,000, or even $100,000 out of your Roth IRA, and it won’t change your income taxes. It won’t make more of your Social Security taxable. And it won’t raise your Medicare premiums.
One thing to watch: the conversion itself does count as income in the year you do it. Medicare looks back at your income from two years earlier when setting premiums, so a large conversion can bump your premiums for a year. That’s why the size and timing of each conversion matter.
Is a Roth conversion right for you?
A Roth conversion isn’t an all-or-nothing choice. Many people convert a slice each year, sized to “fill up” their current tax bracket without spilling into the next one. Others convert more in low-income years, like the gap between retiring and starting Social Security.
Here are a few questions to ask yourself before December 31st:
- Do I expect my tax rate in retirement to be the same or higher than it is now?
- Do I have cash outside my retirement accounts to pay the tax on a conversion?
- Is the market down this year, which would make converting cheaper?
- Am I close to a Medicare premium threshold or a tax bracket edge?
- Do I want to leave tax-free money to my kids or other heirs?
If the idea of a Roth conversion still feels new and you’re nervous about doing it yourself, you don’t have to figure it out alone. You can schedule a personal meeting with our team to talk through your numbers, get tips on doing it the right way, and decide whether you want help putting the strategy in place, like we do for our clients each year.
Frequently Asked Questions
What is the deadline for a Roth conversion?
December 31st. A conversion has to be completed by the last day of the year to count for that tax year. Unlike IRA contributions, you can’t do it in the new year and apply it to the prior year.
Do I have to pay taxes when I do a Roth conversion?
Yes. The amount you convert from a pre-tax account counts as taxable income in the year you convert. In exchange, that money and its future growth can come out tax-free later, as long as you meet the Roth rules.
Why is a down market a good time to convert?
You pay tax on the value of what you convert. When prices are low, that value is lower, so the tax bill is smaller. When the market recovers, the rebound happens inside the Roth, tax-free. In our example, converting after a drop from $10,000 to $8,000 saved $400 in taxes.
Can Roth withdrawals raise my Medicare premiums?
Qualified Roth withdrawals don’t raise your adjusted gross income, so they won’t push up your Medicare Part B premiums or make more of your Social Security taxable. The conversion itself does count as income in the year you do it, though, so plan the size carefully.
Can I convert money from my DCP or Plan 3?
The DCP and the investment side of Plan 3 are pre-tax accounts, so they face the same “taxed later” problem as an IRA. Rules on when and how you can move or convert that money depend on the plan and whether you’re still working. It’s worth checking your options before you make a move.
Should I convert everything at once?
Usually not. Converting a large amount in one year can push you into a higher tax bracket and raise your Medicare premiums. Many people spread conversions over several years to keep each year’s tax bill in check.
There are five good reasons to look at a Roth conversion this year. They’re still available. You’ll never be younger than you are today. Roth money grows tax-free. A down market can make converting cheaper. And a Roth works as insurance against future tax hikes and hidden retirement taxes. Your future depends on what you do today.
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