Roth IRAs are powerful savings vehicles that allow us to contribute after-tax dollars that grow tax-free and are withdrawn tax-free. There are no required minimum distributions during the original account owner’s life, which provides a lot of flexibility and tax efficiency if managed properly.

Among traditional IRA account holders, the question of whether to convert to a Roth often arises. Several factors should be considered such as your current tax bracket, your anticipated tax bracket in retirement, your age, your ability to pay the tax bill with funds outside of your retirement account, and the proximity to the time you will need the funds.

The mechanics of a Roth conversion include opening a Roth IRA, identifying an amount within your traditional IRA to convert, providing instructions to your broker, determining whether you will pay the taxes on the conversion out of the Traditional IRA or out of other funds you have. Note that if you are under the age of 59 ½ you will want to pay the taxes with funds outside of your retirement account to avoid incurring a 10% early withdrawal penalty on the funds earmarked to pay the taxes on your conversion. Finally, reporting your conversion on Form 8606 and the taxable portion of the conversion income on your Form 1040.

Planning in advance is the best approach as you can develop a strategy that over several years “fills up” your current income tax bracket (conversions count towards your taxable income) each year with conversion amounts without ever moving you up into the next tax bracket. Such a strategy can lead to lower taxes and higher account values, not to mention a higher percentage of tax-free assets in your overall portfolio.

Unfortunately, there is not a one-size fits all strategy for Roth conversions. Each person’s situation is unique and can lead to different optimal outcomes. If you’re interested in learning more about Roth conversions, you should start by speaking with  tax and financial professionals.