Jean Chatzky warned of common IRA blunders in HerMoney.
Converting a traditional IRA to a Roth sounds straightforward: pay your taxes now and enjoy tax-free growth later.
But journalist and personal finance expert Jean Chatzky has a pointed warning for anyone about to make the move, and it starts with where you plan to get the money to cover that tax bill.
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“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.
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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.
Dorsey Wealth Management sums it up plainly: if you have no existing pre-tax IRA balances, the backdoor Roth typically results in little or no additional tax beyond any earnings. If you do carry pre-tax IRA balances, the IRS adds all your accounts together, which can get complicated (3).
One way around it, TIAA points out, is that the pro-rata rule doesn’t apply to employer-sponsored plans like 401(k)s or 403(b)s, just IRA money. Some people roll pre-tax IRA balances into their 401(k) before executing the backdoor conversion to reduce or eliminate the pro-rata impact.
Don’t skip the paperwork
Vanguard flags that anyone executing a backdoor Roth must file IRS Form 8606 to report the nondeductible contribution and conversion.
The form “tracks your after-tax basis and ensures you’re not taxed on the money again” when you withdraw it in retirement. Skip it, and you risk paying taxes twice on the same dollars (4).
Chatzky’s bottom line: “What I would do is look at your menu of traditional IRAs … and convert them strategically based on your financial situation and your ability to pay those taxes, at the time, out of proceeds that are not in retirement accounts.”
The long-term case for Roth accounts is compelling — no required RMDs during your lifetime for Roth IRAs, and tax-free withdrawals in retirement, with the potential for tax-free inheritance for your heirs (subject to applicable rules).
But getting there without a costly surprise requires considerably more planning than most people expect. When in doubt, consider consulting a qualified tax professional before clicking convert.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
HerMoney (1); TIAA (2); Dorsey Wealth Management (3); Vanguard (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
