A video you should also watch before diving into this one:
Back Door IRA Rules: Don’t Get Them Wrong
Summary: If you’ve ever heard “Roth conversions” and thought, “Yeah… sounds expensive,” you’re not wrong — but you might be missing the part where it can also save you a ridiculous amount of money (and stress) later. In this episode, JD White explains Roth conversions in plain English, shares a real client mistake that was quietly costing about $10,000 a year, and walks through the three things that make a Roth conversion actually worth doing.
Roth Conversions, Explained (Without the “Alphabet Soup”)
I’m JD White, and this is The Retirement Cheat Code — the channel that helps you learn about all things retirement so you can not only retire, but crush retirement.
Also, quick public service announcement: every once in a while this chair I’m sitting in just gives out and scares the be-Jesus out of me. That just happened. Anyway… let’s get into it.
Before you watch this, I’d recommend two quick foundation videos:
Roth IRA Explained: The Retirement Account Everyone Should Have
Those lay the groundwork for why Roth conversions work the way they do.
What Is a Roth Conversion?
A Roth conversion is pretty straightforward:
You move money from the pre-tax bucket (like a traditional IRA or a 401(k)) into a Roth IRA.
And when you do that, you “pay off the tax man”:
- Federal taxes (IRS)
- State taxes (if your state has income tax)
The important part: a Roth conversion increases your taxable income for the year.
So you’re not dodging taxes — you’re choosing when to pay them.
One quick caveat: non-deductible money and the pro rata rule
If you have non-deductible contributions inside an IRA or 401(k) (meaning you didn’t get a tax deduction when you put it in), that portion can convert tax-free.
But… there’s a pro rata rule that can complicate things. JD covers this more deeply in the backdoor Roth IRA video.
For most people, the clean version is:
You should assume you’ll pay income taxes on 100% of the amount you convert.
A Real-Life Example: How “Helping Mom” Accidentally Created a Tax Mess
Here’s a situation I saw while reviewing tax returns:
A client’s kids were pulling large amounts from Mom’s traditional IRA to give money away as gifts.
What they didn’t realize: a traditional IRA distribution is taxable income — same “income bump” effect as a Roth conversion.
That did two things:
- Pushed Mom into a much higher tax bracket than she needed to be in
- Increased her Medicare premiums (because Medicare looks at your taxable income)
Once JD helped them understand the ripple effects and adjust how they did the gifting, it saved the family around $10,000 per year.
Moral of the story: you don’t have to be doing anything “wrong” to create a tax problem. Sometimes you’re just accidentally stepping on a landmine.
What Makes a Roth Conversion Actually Work?
From a financial planning perspective, there are three big things to look at.
1. Avoid withholding taxes from the conversion (if you can)
When you convert, most custodians will offer to withhold federal and state taxes.
Example:
- Convert $10,000
- Withhold 15% federal ($1,500)
- Withhold 5% state ($500)
Now only $8,000 makes it into the Roth.
My preferred approach (when possible):
- Convert the full $10,000 into the Roth
- Pay the taxes separately using estimated tax payments
Why? Because you’re getting 100% of the converted dollars into the tax-free growth bucket.
2. The tax bracket math needs to make sense
Roth conversions tend to work best when you believe one of these is true:
- You’ll be in a similar tax bracket later
- You’ll be in a higher tax bracket later
- Tax rates are likely to rise over time
If you’re very confident you’ll be in a significantly lower bracket later, converting now may not be the move.
A note: tax rates are slated to rise in 2026, which makes the “what will taxes do next?” question pretty relevant.
3. Timing matters (income timing and market timing)
Two timing windows can make Roth conversions especially powerful:
Income timing:
- Between jobs
- Variable income years
- Any year your taxable income is unusually low
Those can be great opportunities to “fill up” a lower tax bracket with a conversion.
Market timing:
- If your investments are down, you may be able to convert at a discount
- If the assets recover later inside the Roth, that rebound growth can be tax-free
My point: you don’t always control the perfect year, but if you can choose your spots, it can make a big difference.
Final Thoughts
Roth conversions aren’t complicated in concept — you’re just moving money from pre-tax to Roth and paying the taxes. The nuance is in the consequences: tax brackets, Medicare premiums, and whether you’re converting efficiently.
Be sure to catch the two follow-up videos coming soon:
- Five reasons why I love Roth conversions
- Five reasons why I hate Roth conversions
As always, I really appreciate you watching and supporting the channel.
