What is a Roth Conversion?
A Roth conversion is when you move money from a traditional IRA or 401(k) to a Roth IRA. You pay taxes on the converted amount now, but all future growth and withdrawals are tax-free.
It's essentially prepaying your taxes at today's rates instead of paying at future (unknown) rates.
Why Consider Roth Conversions?
The potential benefits are significant:
- 🎯 Tax diversification - Create a tax-free bucket for retirement
- 📉 Lock in current tax rates - If you expect rates to rise
- 💰 Reduce future RMDs - Roth IRAs have no required distributions
- 👨👩👧 Better estate planning - Tax-free inheritance for heirs
- 🛡️ Medicare premium protection - Lower MAGI in retirement
When Roth Conversions Make the Most Sense
The "Gap Years" Strategy
The best time to convert is often in the gap years between retirement and Social Security/RMDs:
- Age 55-62: Retire early, before Social Security
- Age 62-70: May have reduced income before SS maximizes
- Result: Fill up lower tax brackets with conversions
Example: The Gap Years in Action
Sarah retires at 58 with $1.5M in her traditional 401(k). Before Social Security at 67:
| Without Conversions | With Conversions |
|---|---|
| Taxable income: ~$0/year | Convert $80,000/year |
| Tax paid: $0 | Tax paid: ~$9,000/year |
| At 67, RMDs force high taxes | At 67, much smaller RMDs |
| Lifetime taxes: $450,000+ | Lifetime taxes: $280,000 |
By paying taxes in the 12% and 22% brackets during gap years, Sarah avoids paying in the 32%+ brackets later.
The 2024 Tax Brackets
Understanding brackets is key to conversion strategy:
| Tax Rate | Single Filer | Married Filing Jointly |
|---|---|---|
| 10% | $0 - $11,600 | $0 - $23,200 |
| 12% | $11,600 - $47,150 | $23,200 - $94,300 |
| 22% | $47,150 - $100,525 | $94,300 - $201,050 |
| 24% | $100,525 - $191,950 | $201,050 - $383,900 |
| 32% | $191,950 - $243,725 | $383,900 - $487,450 |
| 35% | $243,725 - $609,350 | $487,450 - $731,200 |
| 37% | $609,350+ | $731,200+ |
Strategy: Convert up to the top of the 22% or 24% bracket each year.
How Much Should You Convert Each Year?
The art of Roth conversions is finding the optimal annual amount. Convert too little, and you miss the opportunity. Convert too much, and you push into high brackets.
Factors to Consider
- Current income - What bracket are you already in?
- Standard deduction - $14,600 single / $29,200 married (2024)
- Other income - Dividends, part-time work, rental income
- Tax bracket thresholds - Don't jump brackets unnecessarily
- State taxes - Some states don't tax retirement income
- ACA subsidies - Conversions count as income for healthcare subsidies
The "Fill the Bracket" Approach
A simple strategy:
- Calculate your income for the year
- Add standard deduction ($14,600 or $29,200)
- Find the top of your target bracket
- Convert the difference
Example (Married):
- Target: Top of 22% bracket = $201,050
- Current taxable income: $30,000
- Standard deduction: $29,200
- Room to convert: $201,050 - $30,000 - $29,200 = $141,850
Common Roth Conversion Mistakes
❌ Mistake 1: Paying Taxes from the Conversion
Don't pay the tax bill from converted funds. This reduces what goes into the Roth and can trigger early withdrawal penalties if you're under 59½.
Solution: Pay taxes from separate funds (savings, taxable account).
❌ Mistake 2: Converting Too Much in One Year
Jumping from the 12% bracket to the 37% bracket defeats the purpose.
Solution: Spread conversions over multiple years.
❌ Mistake 3: Ignoring IRMAA
High income in any year can trigger Medicare premium surcharges (IRMAA) for two years.
Solution: Stay below IRMAA thresholds or plan for the surcharge.
❌ Mistake 4: Waiting Too Long
Starting conversions at 72 when RMDs begin limits your flexibility.
Solution: Start considering conversions 10-15 years before RMDs.
The 5-Year Rule
Money converted to a Roth IRA must stay there for 5 years before you can withdraw the converted principal tax-free without penalty (if under 59½).
However, if you're over 59½, you can withdraw converted amounts immediately without penalty. The 5-year rule still applies for avoiding the 10% penalty on conversions made while under 59½.
When NOT to Convert
Roth conversions aren't always the right move:
- 📈 You're in a high bracket now - Will you really be higher later?
- 🏥 ACA subsidies are critical - Conversions can eliminate subsidies
- 💸 No funds to pay taxes - Using conversion funds for taxes is inefficient
- 📅 Very short time horizon - Less time for tax-free growth to compound
- 🏛️ Moving to a no-income-tax state - Why pay now if you won't pay later?
How RetirePro Models Roth Conversions
RetirePro's tax planning tools help you:
- 📊 Model conversion scenarios - See the impact over time
- 💰 Optimize annual amounts - Find the sweet spot
- 📈 Compare total lifetime taxes - With vs. without conversions
- 🎯 Account for RMDs - Project future required distributions
The Bottom Line
Roth conversions are a powerful tax planning tool, but they require careful analysis. The goal is to pay taxes at lower rates now to avoid paying at higher rates later.
The best time to start planning is years before retirement—not when you're already facing RMDs.
Ready to analyze your Roth conversion strategy? RetirePro models tax scenarios and helps you optimize conversions year by year. Plan your conversions →
Related tools: Retirement Calculator | 401(k) Calculator | Social Security Calculator