Roth Conversion
Definition
Converting pre-tax money from a traditional IRA or 401k into a Roth IRA. You pay taxes in the conversion year, but then everything grows tax-free. Useful for high-income earners and early retirees in low-income years.
Why It Matters
Roth conversions let you access tax-free growth even if you've maxed out Roth contributions. During career breaks or low-income years, converting is powerful. At age 59.5+, you can access converted funds without penalty.
Example
Take a sabbatical, earn $30k, normally in 22% bracket. Convert $100k from IRA to Roth. Conversion income pushes you to $130k, about 24% bracket equals $24k tax. But that $100k grows tax-free forever. If it becomes $500k, you avoided $80k+ in future taxes.