Definition
Moving money from a pre-tax retirement account, such as a traditional IRA or 401(k), into a Roth account. The converted amount is taxed as ordinary income in the year of the conversion, and in exchange all future growth and qualified withdrawals are tax-free. There is no income limit and no cap on how much you can convert, and a conversion cannot be undone.
Why it matters
A conversion is a bet that your tax rate today is lower than it will be when you would otherwise withdraw, which is why low-income years, early retirement before Social Security, and market dips are the classic windows. Each conversion starts its own five-year clock before the converted amount can be withdrawn penalty-free by someone under 59½, and paying the tax out of the converted money itself, rather than from savings, shrinks the benefit and can trigger the penalty.