The Roth Conversion Questions Every Retiree Should Ask
Roth conversions are a transformative, post-retirement option that provide avenues for tax benefits and can serve as a generational wealth transfer tool. However, analyzing Roth conversions requires multi-year tax planning and the benefits are often misunderstood by the people who meet the criteria for them. If you are retired, sitting on a substantial IRA, and not yet taking Required Minimum Distributions (RMDs), Roth conversions might be suitable for you. Here are some of the questions we hear most often and our thought process for answering them:
- What are the advantages of Roth conversions for someone already retired?
For starters, Roth conversions can save you significant tax money throughout retirement if executed properly. The tax money you can save is a result of two scenarios: executing while in a lower income tax bracket and creating tax diversification.
The time between retirement and taking RMDs (age 73) is often referred to as an opportune “Roth conversion window”. During this window, you are likely to find yourself in a lower tax bracket because you no longer have employment income, and you have not started taking RMDs yet. Making Roth conversions while in this lower tax bracket window is advantageous because it may trigger less taxes now, as opposed to waiting until later when you are faced with bulky RMDs that stack onto other sources of income, pushing you into higher tax brackets. Furthermore, once you choose to make Roth conversions, you will have both pre-tax and after-tax buckets to potentially draw from during retirement. This is known as tax diversification, and it gives you flexibility to manage your income sources in retirement, pulling from whichever bucket makes sense each year.
The second major advantage to consider relates to estate planning benefits. For one, RMDs are not required on Roth IRAs. Once converted, the dollars in your Roth can grow tax-free for the rest of your life. Roth IRAs are also a tax-efficient asset to leave heirs because they can draw from the inherited Roth tax-free. Inherited Roth IRAs are subject to the 10-year rule, meaning the beneficiary must withdraw all the money within 10 years. But they also aren’t required to take minimum distributions, so that money can continue to grow tax-free for an additional 10 years beyond your lifetime. On the other hand, your traditional IRA would be inherited as a pre-tax account, RMDs will need to be taken by the beneficiary, and each distribution taken during that 10-year period would be subject to ordinary income tax.
- Should I do a large Roth conversion now, or spread them out over the next few years?
Converting a traditional IRA into a Roth IRA can provide significant long-term tax benefits, but determining the appropriate conversion amount depends entirely on your personal situation. Remember, in an ideal scenario, your taxable income is temporarily lower after retirement and before RMD age. So, it is important to be intentional with how you execute Roth conversions. Convert too much in a single year and you can push yourself from a moderate bracket into a dramatically higher one. A useful rule of thumb is to convert only enough to stay within the 24% federal bracket, since the jump to the next bracket (32%) is steep.
Smaller, repeated conversions often make more sense, as does waiting to make those conversions until the end of the year when your total income is reasonably accounted for. Spreading conversions out over several years rather than doing one large conversion tends to be the most tax-efficient approach.
Preparing multi-year income tax projections can be a valuable and necessary tool to help assess the amount to convert to a Roth during that gap between retirement and RMD age. For example, a $2.5 million IRA at retirement could easily generate an initial RMD well north of $100,000, and that level of RMD can push you into a higher bracket later. Tax projections can help determine how much you can convert each year prior to RMD-age, at a tax bracket lower than you will be in once you start taking those RMDS.
- What other factors should I consider?
Even if you meet the criteria for Roth conversions, there is not a one-size-fits-all solution on how to do them. There are other factors to consider that are unique to everyone, such as income needs in retirement, social security timing, and Medicare premiums.
Converting to Roths can be beneficial for everyone, but they are especially beneficial for those who do not need IRA dollars to live on and can thus let them continue to grow tax-free for life. If this is the case, it is important to make sure you have sufficient cash flow to cover your living expenses through retirement. Cash flow can be sourced from taxable accounts, other retirement accounts, deferred compensation plans, social security benefits, etc.
Deciding when to start social security is another factor to consider for Roth conversions. When you choose to claim social security affects not just your monthly check, but how tax-efficient your overall income picture is during the Roth conversion window and thereafter. Depending on the size of your conversions, it may be wise to delay your social security start date so that you do not end up in an unfavorable tax bracket while converting.
Additionally, Roth conversions may have an impact on Medicare premiums. Because conversions will increase your taxable income, you could potentially pay more in Medicare premiums if your taxable income crosses a certain threshold. If your conversions push your income over this threshold, you will qualify for an additional surcharge known as IRMAA (Income-Related Monthly Adjustment Amount) that applies to Medicare premiums. The IRMAA has a two-year lookback rule, so a Roth conversion you make this year (2026) can impact your Medicare premiums in 2028.
In conclusion, Roth conversions are a significant planning opportunity that should be carefully examined before executing. There are lots of factors that influence the decision to make conversions which is why proper planning and multi-year tax projections are so important. If nothing else, remember to evaluate whether Roth conversions are a good fit for your overall goals prior to losing valuable time within the conversion window.
