Roth conversions are often used as a retirement tax planning tool. They offer the opportunity to pay taxes now — often at a lower rate — in exchange for tax-free withdrawals later in life. In this post, we’ll walk through the standard, conventional guidance for when and why to convert funds from a traditional IRA to a Roth IRA.
What Is a Roth Conversion?
A Roth conversion involves moving money from a tax-deferred account like a Traditional IRA into a Roth IRA. When you do this: You pay income tax on the amount converted for the conversion tax year. Once in the Roth IRA, that money grows tax-free and qualified withdrawals in retirement are also tax-free.
Why Convert to a Roth?
The primary reason to consider a Roth conversion is simple: convert now at a low tax rate to avoid higher taxes later.
Here are common situations where a Roth conversion may make sense:
- You expect higher tax rates in retirement. Whether due to rising national deficits, expiring tax cuts, or your own income increasing over time, many retirees expect to be in a higher bracket later. Converting now locks in today’s lower rate.
- You’re in a temporarily low-income year. This often happens after retirement but before Social Security and RMDs begin. These “low-tax years” are ideal for filling up lower tax brackets with Roth conversions.
- You want to reduce future RMDs. Required Minimum Distributions (RMDs) from traditional IRAs begin at age 73 (for most people) and can push you into higher tax brackets. Roth IRAs have no RMDs during your lifetime, giving you more control.
- You want to leave a tax-free inheritance. Roth IRAs are a great estate planning tool. Heirs must still take RMDs, but the withdrawals are tax-free — a valuable benefit compared to inheriting a taxable traditional IRA.
When a Roth Conversion May Not Make Sense
Conventional advice also warns against conversions in some situations:
- You expect lower tax rates later (e.g., due to future deductions, reduced income, or moving to a lower-tax state).
- You need to withdraw funds soon, and converting now would trigger unnecessary taxes.
- You have to pay conversion taxes out of retirement assets (rather than from a taxable account), reducing the power of compounding inside tax-advantaged space.
Typical Strategies: “Fill the Bracket”
A popular strategy is to convert just enough each year to “fill up” your current tax bracket without jumping into a higher one.
For example, if the 12% tax bracket ends at $96,950 for a married couple, and your taxable income is $70,000, you might convert about $26,950 — keeping you in the 12% bracket.
Alternatively one can convert up to a: specific ACA/IRMAA subsidy or threshold or any other meaningful milestone such as the income threshold at which Social Security retirement benefits begin to be taxed.
This approach helps you smooth your tax burden over time and prevent larger tax spikes later.
Things to Consider Before Converting
- Do you have cash to pay the taxes? Paying from a taxable account is ideal.
- Will the conversion trigger IRMAA surcharges on Medicare? Monitor for MAGI income thresholds at age 63 and above.
- Are you near tax cliff benefits? Like the ACA Premium Tax Credit or Social Security taxation thresholds.
Summary: What the Conventional Wisdom Says
Question: Convert when in low tax bracket?
Answer: Yes
Question: Pay tax from IRA instead of taxable account?
Answer: Prefer not to
Question: Convert all at once?
Answer: Spread over several years
Question: Use Roth to avoid IRA RMDs?
Answer: Yes
Question: Do conversions benefit heirs?
Answer: Yes, if estate is large
ROTH conversion success criteria
The most conventional reason to convert is cited as minimizing lifetime tax paid. We believe that that is not the relevant metric. When assessing the efficacy of a ROTH conversion from a traditional IRA to a Roth, the evaluation hinges on demonstrating a superior after-tax financial outcome under one of two primary conditions:
a) Increased After-Tax Spending Capacity: does the conversion result in a greater or equal annual after-tax spending each year compared to the baseline scenario for same “after tax” terminal value?
b) Equivalent After-Tax Spending with Enhanced Terminal Value:
Can the conversion enable the maintenance of an identical annual after-tax spending level each year throughout one’s lifetime, while simultaneously yielding a higher after-tax inheritable amount at the conclusion of the planning horizon?
A conversion can be deemed financially advantageous if it satisfies either of these conditions or a weighted combination thereof , indicating a net positive impact on after-tax wealth and distribution.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Consult with a qualified financial advisor for personalized guidance.
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