How to Advise Clients on Roth IRA Conversions: A CPA's Step-by-Step Tax Guide

A Roth conversion is taxable in the year executed: the converted amount is included in gross income under IRC §408A(d)(3) as if distributed from the traditional IRA, then immediately re-contributed to the Roth account. The long-term value proposition — permanently tax-free growth and no future required minimum distributions — is straightforward. The CPA's job is to determine when to convert, how much to convert in any given year, and what downstream effects on the QBI deduction, Medicare surcharges, and estimated tax obligations the conversion triggers. A conversion that looks attractive on a standalone basis often looks different when those interactions are modeled.

Prerequisites

  • Client's prior-year federal tax return and a current-year income projection, including all income sources
  • Balance and cost basis of all traditional IRAs, SEP-IRAs, and SIMPLE IRAs (needed for the pro-rata calculation under IRS Publication 590-B)
  • Whether the client has made prior non-deductible IRA contributions (tracked via Form 8606)
  • Filing status, estimated MAGI for the conversion year, and projected income for retirement years
  • Current-year estimated tax payment schedule — conversion income must be incorporated before the applicable quarterly deadline

Step 1: Compare the Client's Current Marginal Rate to Their Expected Rate in Retirement

The foundational logic of a Roth conversion is tax rate arbitrage: pay taxes today at a rate you expect to be lower than the rate you'd pay on distributions in the future. If a client is in the 24% bracket now and expects to be in the 32% bracket after Social Security begins and RMDs from a large traditional IRA kick in, a conversion at 24% has clear positive expected value. If the current and future rates are the same, the conversion is a wash on income tax — the value comes entirely from removing the account from the taxable estate and eliminating future RMDs.

Key rate-comparison factors to model:

  • Current-year marginal rate, accounting for all income sources (wages, K-1 distributions, investment income, capital gains)
  • Expected retirement income: Social Security benefits (up to 85% of which is taxable under IRC §86), pension income, RMDs from traditional IRAs and 401(k)s, and investment income from taxable accounts
  • Whether the client's traditional IRA balance is large enough that RMDs at age 73 (rising to 75 in 2033 for clients born in 1960 or later under SECURE 2.0 §107) will push them into a higher bracket than their pre-retirement working years — a common outcome for late-career professionals with decades of pre-tax accumulation

The case where conversion is almost always wrong: A client who is currently at their peak earning years and will have substantially lower retirement income than today. For a client in the 37% bracket now who will retire into the 22% bracket, the conversion math rarely pencils out regardless of assumed growth.

The case where conversion is almost always right: A client in a low-income year — first year of retirement, year of a large business loss, year of heavy deductible contributions — where marginal rates are temporarily below their long-term retirement rate. These windows are often one or two years wide and require proactive identification.

Step 2: Calculate the Conversion Amount Using a Bracket-Filling Approach

Rather than converting the full traditional IRA balance in one year, most clients benefit from a multi-year partial conversion strategy: convert exactly enough each year to fill the current tax bracket without crossing into the next one.

2025 tax brackets at the 22%/24% boundary (per IRS Rev. Proc. 2024-40):

Filing Status 22% Bracket Up To 24% Bracket Up To
Single $100,525 $191,950
Married Filing Jointly $201,050 $383,900

A married client with $150,000 in projected taxable income before any conversion has approximately $51,050 of space in the 24% bracket. Converting $51,050 of traditional IRA funds fills the bracket exactly — any additional conversion dollar enters the 32% bracket. That same conversion executed in two years at 24% produces a measurably different result than converting $102,100 in a single year that crosses into 32%.

Cliff effects to avoid: Several income thresholds create sharp discontinuities that must be modeled when sizing a conversion:

  • QBI phase-out range: For 2025, the Section 199A deduction begins phasing out at $197,300 (single) / $394,600 (MFJ) for all qualified businesses, per IRS Rev. Proc. 2024-40. For clients operating SSTBs (physicians, attorneys, consultants, financial advisors), the deduction phases out completely above $247,300 single / $494,600 MFJ. A conversion that crosses this threshold eliminates the QBI deduction — a sudden increase in effective tax rate that often exceeds the conversion's long-term benefit. See QBI Deduction in 2025: How Section 199A Works After OBBBA for the full phase-out calculation.
  • IRMAA thresholds: Medicare Part B and Part D surcharges apply once MAGI exceeds $106,000 single / $212,000 MFJ (2026 thresholds, based on 2024 income under the two-year lookback). Each tier adds $69–$419 per month per person. A conversion that crosses an IRMAA tier adds permanent Medicare premium increases for the two years following the conversion year — a cost that compounds if the conversion happens annually.
  • Net Investment Income Tax (NIIT): IRC §1411 imposes a 3.8% surcharge on net investment income above $200,000 single / $250,000 MFJ. Roth conversion income is not itself subject to NIIT (it is ordinary income, not investment income), but it increases MAGI, which is the denominator in the NIIT threshold calculation. A client who previously had $40,000 in capital gains just below the $200,000 NIIT threshold may find that a $20,000 conversion pushes the capital gains over the threshold — generating an additional $760 in NIIT from the conversion.
  • Child Tax Credit phase-out: For clients with qualifying children, Roth conversion income counts toward MAGI and can push a client into or deeper into the CTC phase-out range ($400,000–$440,000 MFJ / $200,000–$240,000 single). Each additional $1,000 of MAGI reduces the CTC by $50 per child — a $30,000 conversion for an MFJ client at $385,000 with two qualifying children costs $750 in lost CTC on top of the income tax on the converted amount. See Child Tax Credit 2025: Income Limits, Phase-Outs, and How to Maximize It for Clients for the full phase-out calculation and MAGI reduction strategies.

Step 3: Apply the Pro-Rata Rule Before Executing Any Conversion

The pro-rata rule under IRS Publication 590-B and Treas. Reg. §1.408A-4 is the most commonly overlooked element of Roth conversion planning. It applies whenever a client holds traditional IRA funds that include any pre-tax contributions or deductible rollovers alongside after-tax (non-deductible) basis tracked on Form 8606.

The rule in plain terms: When a client converts any amount from a traditional IRA to a Roth IRA, the conversion is treated as coming pro-rata from pre-tax and after-tax funds across all traditional IRAs, SEP-IRAs, and SIMPLE IRAs the client holds — regardless of which account the conversion comes from. The client cannot cherry-pick the after-tax basis account and convert only that.

Example: A client has two traditional IRA accounts — Account A holds $90,000 of deductible rollovers (all pre-tax), and Account B holds $10,000 of non-deductible contributions (after-tax, tracked on Form 8606). Total traditional IRA balance: $100,000. After-tax percentage: 10%. If the client converts $10,000 to Roth, only 10% of that conversion ($1,000) is tax-free. The remaining $9,000 is taxable — even if the client converts entirely from Account B.

The backdoor Roth for high earners: Clients above the Roth IRA direct contribution income phase-out ($165,000 single / $246,000 MFJ for 2025) can still accumulate Roth funds through the backdoor Roth strategy: make a non-deductible contribution to a traditional IRA (Form 8606 required), then immediately convert to Roth. The conversion of a just-made non-deductible contribution is nearly fully tax-free — as long as no other traditional IRA balances exist. If the client has rollover IRAs, SEP-IRAs, or other pre-tax traditional IRA funds, the pro-rata rule applies and most of the conversion will be taxable, eliminating the strategy's benefit.

Common workaround: Clients with pre-tax IRA funds can roll those funds into their employer's 401(k) plan (if the plan accepts rollovers), removing them from the pro-rata calculation and leaving only the after-tax basis in the IRA. This is worth the administrative effort for clients with significant non-deductible IRA basis and an accepting employer plan.

Step 4: Determine Whether the Conversion Year Timing Optimizes for IRMAA and Estate Planning

Two timing considerations that CPAs frequently underweight:

IRMAA lookback: Medicare premium surcharges for a given year are based on income from two years prior. A large Roth conversion in 2026 increases 2028 Medicare premiums — not 2026 or 2027. For clients who plan to enroll in Medicare within the next two years, the IRMAA impact window is closer than it appears. For clients already on Medicare who have a windfall or conversion year, the surcharge applies in the second following year and then disappears if income normalizes.

Estate and RMD planning interaction: The SECURE 2.0 Act's RMD age increase to 73 (and 75 for those born in 1960 or later) creates a planning window for clients who retire before the mandatory distribution age. A client who retires at 68 has five or more years of potentially lower income before RMDs begin — a multi-year conversion runway that allows systematic bracket-filling at rates below what the RMD years will impose. Roth IRAs are never subject to RMDs during the owner's lifetime (IRC §408A(c)(5)), making them the most estate-efficient retirement account for clients who do not need the funds and want to pass assets to heirs. For the SECURE 2.0 RMD changes and the enhanced catch-up contribution rules that interact with this planning window, see SECURE 2.0 Act Retirement Plan Changes Every CPA Must Know for 2025–2026.

Non-spouse beneficiaries: Under the SECURE Act, most non-spouse beneficiaries must withdraw inherited traditional IRA funds within 10 years (IRC §401(a)(9)(H)), generating taxable income potentially in the beneficiary's peak earning years. A Roth IRA inherited by a non-spouse beneficiary is also subject to the 10-year rule, but those distributions are entirely tax-free. For clients with large IRAs intended for adult children in high income years, converting to Roth transfers the tax liability to the original owner (often at a lower rate) and eliminates it entirely for the heir.

Step 5: Coordinate Estimated Tax Payments for the Conversion Year

The converted amount is ordinary income in the year of conversion — it increases the client's estimated tax obligation beginning with the quarter in which the conversion occurs. A conversion executed in October falls in Q3 (the September 15 estimated tax deadline has passed), meaning the tax on the conversion is due with the Q4 payment on January 15, but the underpayment penalty under IRC §6654 calculates quarter-by-quarter. Late-year conversions can still generate an underpayment penalty for Q3 unless the client qualifies for a safe harbor.

Safe harbor application: The standard safe harbor requires payment of the lesser of (a) 100% of the prior year's tax liability (110% if prior-year AGI exceeded $150,000) or (b) 90% of the current year's tax liability. A client who satisfies the prior-year safe harbor is penalty-free regardless of the conversion's size — but this requires that the prior-year estimated payments were already set to cover 100%/110% of last year's liability before the conversion decision was made.

Withholding from the conversion is almost always a mistake: IRA custodians often ask whether the client wants taxes withheld from the converted amount. For a client under age 59½, withholding reduces the converted principal — and any withheld amount that does not reach the Roth IRA is treated as a distribution, subject to income tax and the 10% early withdrawal penalty under IRC §72(t). Even for older clients, withholding reduces the invested Roth balance without benefit; additional estimated tax payments from non-IRA funds are almost always the better approach.

For the full estimated tax calculation methodology — safe harbor thresholds, annualized income installment method, and Q4 catch-up procedures — see How to Calculate and File Quarterly Estimated Taxes for Business Clients.

Step 6: Execute the Conversion, File Form 8606, and Communicate the 5-Year Rule

Execution and timing: Most custodians can process a Roth conversion within 1–3 business days. Conversions must be reflected in the account by December 31 to count for the current tax year. Submit conversion requests by mid-December — processing times vary and late-year volume at major custodians causes delays.

Form 8606: Non-deductible IRA contributions and Roth conversions must be reported on IRS Form 8606. The form tracks after-tax basis in traditional IRAs (preventing double taxation on future conversions), calculates the taxable portion of any conversion subject to the pro-rata rule, and confirms the Roth conversion amount. Failure to file Form 8606 can result in basis being lost permanently — meaning the after-tax portion of a prior non-deductible contribution becomes taxable a second time on future withdrawals.

The 5-year rule for converted amounts: Each Roth conversion has its own 5-year holding period for penalty-free withdrawal of the converted principal — distinct from the 5-year rule for qualified distributions of earnings. If a client under age 59½ converts $50,000 and then withdraws that $50,000 within 5 years of the conversion, the 10% early withdrawal penalty under IRC §72(t) applies to the withdrawal even though taxes were already paid on the conversion. Clients who may need the converted funds within 5 years should not convert amounts they cannot afford to lock up. For clients over age 59½, the 5-year rule on converted principal does not apply — only the earnings 5-year rule matters, and earnings are only at risk if the client established their first Roth IRA less than 5 years ago.

Common Mistakes in Roth Conversion Planning

Converting in peak earning years without modeling future rates. The most common error: reflexively recommending Roth conversion for clients who are in their highest earning years and will have substantially lower retirement income. The math rarely supports paying 37% today to avoid 22% later.

Ignoring the pro-rata rule when recommending backdoor Roth. A client with $200,000 in rollover IRAs who contributes $7,000 non-deductibly and converts will find that 96.6% of the conversion is taxable — not the 0% they expected. Always calculate the pro-rata fraction before recommending the backdoor strategy.

Not modeling IRMAA on an annual basis. A client who has been systematically converting at the 24% bracket may cross an IRMAA tier in a conversion year, adding $1,676–$5,028 per year in Medicare surcharges per person for two years. This cost should appear in the conversion analysis, not be discovered after the premium notice arrives.

Recommending withholding from the conversion. As noted above, withholding reduces the Roth principal and can create an unintended taxable distribution. Always coordinate additional estimated tax payments from external funds.

Missing the December 31 deadline. Unlike IRA contributions (which can be made up to the April 15 return due date for the prior year), Roth conversions must be completed by December 31 of the year they apply to. There is no extension for conversions. For the full suite of December 31 hard deadlines that CPAs must manage for business clients, see Year-End Tax Planning Checklist for CPAs: 10 Strategies to Execute Before December 31.

FAQs: Roth IRA Conversions for CPA Clients

Can a client convert a 401(k) directly to a Roth IRA?

Yes. A distribution from a former employer's 401(k) or a rollover IRA can be converted directly to a Roth IRA in a single step — this is a Roth conversion, not a contribution, so it is not subject to the annual contribution income limits or dollar limits. The full converted amount is taxable in the year of conversion under IRC §408A(d)(3). Clients should be aware that direct rollovers avoid mandatory 20% withholding that applies to indirect rollovers; use a direct trustee-to-trustee transfer to the Roth IRA custodian wherever possible.

Does a Roth conversion affect the client's Social Security taxation?

Yes, and often more than clients expect. Up to 85% of Social Security benefits are taxable under IRC §86 once combined income (AGI + non-taxable interest + half of Social Security) exceeds $34,000 (single) / $44,000 (MFJ). A Roth conversion increases AGI and can push a larger portion of Social Security benefits into taxable income. Model the Social Security threshold alongside the income tax bracket analysis.

Can the client undo a Roth conversion if circumstances change?

No. Recharacterization — reversing a Roth conversion — was eliminated by the Tax Cuts and Jobs Act (TCJA) for conversions made after December 31, 2017. A completed conversion is permanent. Clients who are uncertain about their year-end income should wait until late November or December when the annual income projection is most reliable, rather than converting in Q1 or Q2 when income uncertainty is highest.

How does a Roth conversion interact with the SECURE 2.0 Roth catch-up requirement?

SECURE 2.0 §603 requires that employees with W-2 wages of $145,000 or more from the same employer make all catch-up contributions on a Roth (after-tax) basis beginning with plan years starting January 1, 2026. This is a separate issue from Roth IRA conversions — it affects the catch-up portion of 401(k) deferrals, not IRA accounts. However, both involve the same underlying decision: paying tax now for tax-free growth later. Clients subject to the mandatory Roth catch-up may already have meaningful Roth account balances building within their 401(k), which should factor into the overall retirement income projection and conversion sizing analysis. See SECURE 2.0 Act Retirement Plan Changes Every CPA Must Know for 2025–2026 for the full compliance timeline.

Is Roth conversion income subject to self-employment tax?

No. Roth conversion income is treated as ordinary income for federal income tax purposes but is not earned income — it is not subject to the 15.3% self-employment tax under IRC §1401 or the additional 0.9% Additional Medicare Tax on earned income. However, the conversion income increases MAGI, which may push investment income over the 3.8% NIIT threshold under IRC §1411. The net effect is income tax at the client's marginal rate, not SE tax.

When should a CPA recommend a client not convert?

Conversion is rarely advisable when: (1) the client will need the converted funds within 5 years and is under age 59½ — the early withdrawal penalty on converted principal applies; (2) the client expects permanently lower income in retirement than their current year, making the rate arbitrage negative; (3) the client cannot pay conversion taxes from non-IRA funds — drawing from the converted balance to pay taxes reduces the invested Roth principal and creates a compounding cost; or (4) the conversion would push the client across a QBI phase-out threshold, eliminating a deduction worth more than the long-term Roth benefit.

What is the correct way to handle a conversion where the IRA contains both deductible and non-deductible contributions?

Use Form 8606 to calculate the pro-rata ratio. The non-taxable percentage equals total non-deductible contributions (the basis from all prior-year Forms 8606) divided by the total year-end balance of all traditional IRAs, SEP-IRAs, and SIMPLE IRAs combined, plus the amount converted. The result determines how much of the conversion is tax-free. Repeat this calculation each year conversions occur; the basis balance decreases as after-tax funds are successfully extracted.

How does a Roth conversion affect state income taxes?

Most states that impose an income tax follow the federal treatment and tax the conversion as ordinary income in the conversion year. States with no income tax (Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska) impose no state tax on conversions. California, New York, and other high-tax states apply their full marginal rates to the converted amount without special exclusion. For clients in high-tax states currently planning to relocate to a no-tax state in retirement, a pre-move conversion at the current state rate foregoes the benefit of converting post-move. The timing of state relocation and the conversion sequence can produce a material difference in state tax liability and should be modeled explicitly.

Arvori helps CPAs manage Roth conversion planning conversations, track client income projections across tax years, and coordinate year-end action items without letting decisions fall through the cracks during busy season. If your practice handles multi-year Roth conversion strategies for business-owning clients, see how Arvori supports advisory workflows at the scale modern CPA practices require.