Jordan Rosenfeld

Thu, May 22, 2025, 7:01 AM5 min read

Preparing for retirement can require income and asset shuffling to make sure you have enough funds available and don’t bump yourself into a higher tax bracket.

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One method for this is known as a Roth conversion. This is a strategy where investors transfer funds invested in pretax accounts like 401(k) plans into a Roth IRA, where the funds are not taxed on withdrawals.

This kind of transfer means investors pay taxes on the converted balance. While this can be a smart strategy in some cases, before doing this, there’s one important step you should take.

The most important factor in deciding whether you should do a Roth conversion is knowing what your marginal tax rate is versus your expected rate when you take out your funds in retirement.

“The marginal tax rate is what you make on the next dollar of income that you have,” according to Josh Kaplan, CFP, enrolled agent (EA) and financial advisor at Armstrong, Fleming and Moore.

He explained that if you were to get a raise, for example, “The marginal tax rate looks at how much you would pay in taxes on your additional income, while the effective tax rate looks at what the average tax rate you pay on all of your income.”

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Understanding the marginal tax rate is important because the Roth conversion is taxable, Kaplan pointed out. “It’s a cost that most people pay out of pocket as opposed to using your IRA to do so, which can have negative consequences.”

One way to think about it is like buying gas on a road trip, Kaplan explained. While each gas station might advertise the same price for fuel, the total cost you pay will vary because of state taxes. What might cost you $40 to fill up your tank in one state, could cost you $45 in another.

“Thinking about that in the context of a Roth conversion, if someone estimates their tax cost based on the effective tax rate, this is likely lower than your marginal tax rate, and you’re going to receive a larger tax bill than you were expecting,” Kaplan said.

It’s most important to remember that a Roth conversion adds taxable income to your tax return, as you are paying the tax now to make pretax money tax-free, said John Jones, a CFP with Heritage Financial. “This can push one into a higher marginal tax rate if they are not careful to calculate the marginal tax bracket breakpoints.”