Finance expert warns of the one thing you shouldn’t do when converting your IRA to a Roth: It could cost you ‘well over 30% of every dollar'

“The deal is, when you convert assets from a traditional IRA into a Roth IRA, you have to pay taxes on the amount that you convert at the time that you do it,” Chatzky wrote on HerMoney. “And so, generally, the advice is, don’t convert unless you have money from outside that IRA in order to pay those taxes.”

Whatever you do, she adds, keep your hands off the converted funds to cover the bill. “What you don’t want to do is pull money out of a tax-advantaged haven and use that money to pay taxes. That could, depending on your tax bracket, cost you well over 30% of every dollar (1).”

It’s a trap that’s easy to stumble into, especially since major brokerages have made the conversion process largely self-serve online, with no advisor required and few built-in warnings about the tax impact before you proceed.

Why your tax bill can snowball fast

According to TIAA, the amount you convert gets added directly to your taxable income for the year — and that can push you into a higher bracket than you anticipated.

As TIAA wealth planning strategies director Jonathan Fishburn puts it, “If you’re in the 22% bracket, maybe you’re okay moving into the 24% bracket, but you might not want to bump up to the 32% bracket, because that’s a big jump.”

TIAA also notes that poorly timed conversions can unintentionally increase Medicare premiums and trigger higher taxation of Social Security benefits — consequences that catch many DIY converters off guard (2).

Chatzky frames the whole decision as a bet on your future tax rate: “When we opt for a traditional IRA over a Roth IRA, it’s generally because we think that our tax rate is going to go down in the future. When we go with a Roth, instead of a traditional, it’s generally because we think our tax rate is lower now and is going to go up in the future.”

Her personal view is that taxes will go up in the future, overall. For anyone who agrees, “having at least some assets in a Roth is beneficial,” she advises.

TIAA recommends taking advantage of lower-income years to convert — such as a period between jobs, a sabbatical or the years after retiring but before required minimum distributions (RMDs) kick in — to minimize your tax hit.

The backdoor Roth

For high earners who exceed IRS income limits for direct Roth contributions, the backdoor Roth is the common workaround.

Per TIAA, the strategy involves contributing after-tax money to a traditional IRA, then converting it to a Roth IRA. And because no tax deduction was taken on the contribution, you generally don’t owe tax on that contribution amount when you convert it.

But there’s a catch: something called the pro-rata rule, which TIAA warns “usually comes with a trap door that catches people by surprise.”

Rather than letting you convert only your fresh after-tax dollars, the IRS taxes each conversion based on the ratio of pre-tax to after-tax money across all your IRAs (including traditional, SEP, and SIMPLE IRAs).

For example, if you have $95,000 in existing pre-tax IRAs and contribute a new $5,000, your total IRA pool is $100,000 — 95% pre-tax. When you convert that $5,000, the IRS treats $4,750 as taxable and $250 as non-taxable, not zero.