When Is a Good Time to Perform a Roth Conversion and What Is the Recommended Way to Pay the Taxes Due?

Federal employees and retirees are hearing much today about the advantages of converting traditional IRA and Thrift Savings Plan (TSP) accounts to Roth IRA and Roth TSP accounts, respectively. The low federal individual tax rates that started with the passage of the Tax Cuts and Jobs Act of 2017(TCJA) and continued with the passage of the One Big Beautiful Bill Act of 2025 (OBBBA) have made it advantageous for a traditional IRA owner and traditional TSP participant to pay the taxes due on Roth conversions now rather than later when federal taxes will likely be higher, according to many tax professionals.

With a Roth conversion, there is also the issue of when to pay the federal and state taxes due on conversion. While many traditional IRA owners and traditional TSP participants would prefer to pay the taxes due when they file their income tax returns in the spring following the year of conversion, tax professionals advise that in order to avoid IRS and state penalties for income tax under withholding, that quarterly estimated tax payments be made in any quarter in which a conversion was performed.

Tax professionals also recommend that traditional IRA owners and traditional TSP participants pay the estimated taxes due with outside funds not part of the IRA or TSP accounts. With a traditional IRA, federal and state income taxes are paid when funds are withdrawn. With a Roth IRA and the Roth TSP, federal and state income taxes are paid on the contributions before the contributions enter the Roth account. This allows contributions to grow potentially tax-free. Paying with funds not involved with the conversion allows for greater compounding over the life of the Roth account. In fact, as an official policy, the TSP does not withhold federal income taxes to pay the tax bill on a conversion. The TSP does not withhold state income taxes from conversions or withdrawals.

Some traditional IRA custodians allow an IRA owner requesting a Roth IRA conversion to withhold federal income tax due on the conversion. But that does not make sense because the traditional IRA owner is immediately subject to income tax on the funds converted. It would have been better to just let the money that would be withheld for taxes to grow tax-deferred rather than pay immediately and then convert. In other words, paying the conversion income tax due out of the conversion would limit tax-free growth opportunity, as the following example illustrates:

Jeff is a federal employee, aged 46. He owns a traditional IRA currently valued at $230,400. Jeff is considering converting $75,000 of his traditional IRA to a Roth IRA. Jeff lives in Florida where there is no state income tax. Jeff will only have to pay federal income tax on the conversion. At the time of conversion, Jeff is in a 22 percent federal marginal income tax bracket. Jeff expects federal income tax rates to increase within 10 to 20 years. He guesses that he will be in a 30 percent marginal tax bracket by the time he withdraws the funds from his IRA. Therefore,  converting now and paying federal income taxes at a 22 percent rate rather than later when paying taxes at a 30 percent rate makes sense. Jeff asks his tax advisor the better way to pay the tax due: (1) Have 22 percent of $75,000 or $16,500 federal income tax withheld from the conversion; or (2) Pay the $16,500 federal income tax separately, thereby allowing the full $75,000 be converted to a Roth IRA. Jeff intends to cash out the converted Roth IRA at age 60. The following assumptions are made:

• Jeff has $16,500 funds available in a separate cash account to pay the federal income tax due; and
• Once converted, the Roth IRA will be invested at an annualized return averaging 8 percent. Note: Past investment return is no guarantee of future investment performance.

Here are the results:

Scenario 1:  Pay federal income taxes due on conversion separately:

$75,000 converted to Roth IRA. Over 14 years and 8 percent annualized return:

Roth IRA value when Jeff is age 60 equal $220,290

Scenario 2:  $16,500 federal income due on conversion is first subtracted from $75,000, resulting in a Roth IRA starting value of $58,500:

Roth IRA value when Jeff is age 60  =    $171,825

$16,500 invested at four percent over 14 years = +   $28,573

Total Roth IRA value:  $200,398

Conclusion: In 14 years, Jeff will have approximately $20,000 more in his Roth IRA if he pays the federal income tax separately when he converts, rather than having the federal income tax due on conversion first subtracted from the traditional IRA amount he is converting. The more years Jeff waits before cashing out his converted Roth IRA account in which he paid the federal income taxes due separately (Scenario 1), the more money Jeff will have in his Roth IRA compared to having the federal income taxes withheld from the traditional IRA before conversion (Scenario 2).   

In short, paying the federal and state income taxes due using separate funds not involved with the conversion allows for greater compounding over the life of the converted Roth IRA. Paying the conversion income tax out of the converting traditional IRA will limit tax-free growth opportunity.

When is a good time to do Roth IRA and Roth TSP conversion?

Although a federal employee’s circumstances vary, Roth IRA and Roth TSP conversions are usually best during low “income gap” years after a federal employee has stopped working before claiming Social Security benefits and before subject to traditional IRA and traditional TSP required minimum distributions (RMDs).

If an employee or retiree has a large traditional IRA and/or traditional TSP account balance, then converting to Roth IRA and Roth TSP makes sense. This is because a large traditional IRA and/or TSP account balance requires making a larger RMD. For most individuals, multi-year conversions make sense with converting an amount of traditional funds each year so as to not push the IRA owner and/or TSP participant into a higher marginal tax bracket.

Another good time to perform a Roth conversion is a year in which the IRA owner and/or Roth TSP participant anticipates a spike in itemized deductions. An example of a spike in itemized deductions is a year in which the IRA owner and/or TSP participant experiences a catastrophic accident leading to a large amount of potentially deductible medical expenses.

Those federal retirees who convert their traditional TSP and traditional IRAs in a year in which they have to take an RMD are advised to be cautious to make the conversion on an amount I addition to the RMD. This is in order to avoid costly penalties. For example, if a retiree has to take a $35,000 RMD in a given year, then the retiree cannot take a smaller RMD of $20,000 and convert $15,000 – the full $35,000 is still mandatory.

Circumstances when a Roth conversion may not be a good choice

If an employee or a retiree is already in the largest federal marginal tax bracket (37 percent) then there is no point in converting to a Roth account. This is because the employee or retiree will likely not be in a lower marginal tax bracket later in retirement. Nothing is gained with respect to tax savings  by converting now rather than not converting and paying the tax when the traditional account is withdrawn later during retirement.

Another recommendation is not to convert a large traditional account within one calendar year. This is  because having a large amount of taxable income associated with a Roth IRA or a Roth TSP in-plan conversion could likely push a federal employee or retiree into a higher marginal tax bracket.

There is also the issue of the Medicare Income-Related Monthly Adjustment Amount (IRMAA) in which additional income associated with Roth conversions could increase Medicare Part B and Medicare Part D monthly premiums as a result of higher adjusted gross income (AGI). The IRMAA adjustment will apply two years after the Roth conversion. This issue will be discussed separately in a future FEDZONE column.

Finally, in order to avoid paying income tax and an early withdrawal penalty, employees and retirees must avoid withdrawing converted traditional IRA and traditional TSP accounts for five years. If they withdraw too early and are younger than 59.5 years old, they will owe income tax in addition to a 10 percent early withdrawal penalty.

Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert

A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement! Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over 20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.

He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters, and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.