Thinking of Doing a Roth IRA Conversion in 2025? Here's What You Need to Know.

There are certain retirement moves, like claiming your 401(k) match, that you can do at any point during the year. There are others you generally do at a specific time. Roth IRA conversions fall into the latter camp, with the end of the year being the popular time to start one.

It's a move that your future self will likely thank you for. But it's important to make sure you understand all the rules before you start moving money around so you can avoid costly tax bills.

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You'll owe taxes in the year you do the conversion

When you put money into a tax-deferred retirement account, you don't pay taxes on those contributions in the year you make them. Instead, you must pay ordinary income taxes in retirement.

Roth accounts work the opposite way. You pay taxes on your contributions when you make them. In exchange, you can withdraw your Roth savings tax-free in retirement.

A Roth IRA conversion enables you to change tax-deferred savings into Roth savings. But to do this, you have to pay taxes on the converted amount in the year of the conversion. For example, if you move $5,000 from a traditional IRA to a Roth IRA in 2025, you'll owe taxes on that extra $5,000 as if it was additional income you earned from your job this year.

This can be tricky because you can't use the converted funds to cover that extra tax bill. You'll need your own savings to cover the cost.

How much extra you'll pay in taxes depends on your tax bracket and the amount you're converting. If you want to convert a large sum, it's often best to break it down into smaller chunks and spread them out over a few years. Convert just enough to take you to the top of your current tax bracket and save the rest for 2026 and beyond.

You might not be able to withdraw your converted funds right away

Even after paying taxes on your Roth IRA conversion, you won't necessarily be able to take that money out tax- and penalty-free like you could with a Roth IRA contribution. There's what's known as the five-year rule for conversions.

This says that you must wait until the converted funds have been in your Roth IRA for at least five years before you can withdraw them penalty-free, if you are under age 59 1/2 at the time you want to withdraw them. The five-year clock begins on Jan. 1 of the year you do the conversion, no matter when during the year you actually do it.

That's another reason waiting until the end of the year to do a Roth IRA conversion is advantageous. If you do your conversion in December 2025, you only have to wait a little over four years until you can access the funds penalty-free.

If you hope to use your converted funds before you turn 59 1/2 -- the age at which the early withdrawal penalty disappears -- it's best to start planning well in advance. Begin making Roth IRA conversions at least five years before you hope to use the money.

You'll have more control over your tax bill in retirement

Roth IRAs enable you to withdraw your contributions tax- and penalty-free at any age. And, as discussed above, you can tap your converted funds penalty-free after five years. This makes it a great alternative to traditional IRAs and 401(k)s for those looking to retire early.

Roth savings also give you greater flexibility over your tax bill in retirement. You can withdraw a mix of tax-deferred and Roth savings throughout the year, and the government will only tax you on the tax-deferred withdrawals. If you find you're nearing the top of your tax bracket, you can switch to Roth savings to stop yourself from jumping up to the next tax bracket.

If you have any questions about how a Roth IRA conversion could affect your taxes this year, consult with an accountant who can give you personalized advice. Then, begin the process soon so you can put it behind you and start looking ahead to 2026.

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