When Should You Do a Roth Conversion? 5 Guiding Principles
Written by John Macy, Financial Coach, MBA, Retirement Income Certified Professional® (RICP)
Introduction
Roth conversions are a powerful tool… but timing (and tax rates) are everything. Do Roth conversions at the wrong time/tax rate, and you could end up worse off than if you had left the money in your traditional IRA. This article discusses guiding principles for doing Roth conversions right.
Definition: A Roth conversion moves money from a traditional IRA or 401(k) to a Roth IRA or 401(k). You pay income tax on the amount converted, and future growth and qualified withdrawals are generally tax-free. |
Looking for strategies that reduce the impact of RMDs or reduce the tax cost of doing Roth conversions? Read our guide: When a Roth Conversion Is a Mistake: Tax-Smart Alternatives.
Guiding Principles for Doing Roth Conversions
Don’t prepay taxes unless you’re getting a real discount.
If your tax rate today is significantly lower than what you expect in retirement, a Roth conversion makes sense. If not, hold off.
👉 Conversions usually make the most sense when the tax rate difference is 8–10% (or more) between what you pay on converted amounts versus what you would pay on withdrawals. Paying 12% now to avoid 22% later? That’s a win. Paying 10% now to avoid 12% later? Probably not.
If the tax rates are the same now as you will pay later, there is not much financial benefit to doing Roth conversions.
If the effective tax rate is the same today on a Roth conversion as you (or your heirs) expect to pay later on Traditional IRA withdrawals, you end up with the same amount of money after tax. The key is finding times when you can convert at a lower rate than you’d pay later on IRA withdrawals.
Typically not a good idea to convert at a higher rate than what you (or your heirs) would pay later on withdrawals.
👉 Example: Don’t pay 32% now on a conversion to avoid paying 24% later during retirement. That’s going backward.
👉 Example: Don’t pay 32% now on a conversion if your heirs will pay 24% (or less) later.
👉 Example: Don’t pay 32% now on a conversion if you plan to pass the IRA on to a charity at your death (or do Qualified Charitable Distributions to a charity during your lifetime). Qualified charities always pay a 0% tax rate.
Look for the “sweet spots” in the tax brackets.
Strategically converting within a tax bracket can save you thousands. Focus on filling up the lowest tax bracket space you can (0%, 10%, 12%, and maybe 22% or 24%). Note that there is technically no 0% tax bracket, but the standard/itemized deductions effectively create a 0% tax bracket. And avoid the large tax bracket jumps (from 12% → 22% and from 24% → 32%) that might be caused by doing Roth conversions.
Keep in mind the ‘Widow’s Tax Trap’.
After one spouse passes away, the survivor's tax filing status changes from "Married Filing Jointly" to "Single", which means higher tax brackets kick in at a much lower income level. For larger Traditional IRA/401(k) accounts (greater than $2 million) that can make future RMDs much more expensive later in life if planning isn’t done in advance. That could tilt the scales in favor of doing more Roth conversions while both spouses are alive, especially those done in 22% or lower tax brackets. In this case, the future bracket to compare is the survivor's single-filer bracket versus current rates in the MFJ brackets.
Summary Decision Framework for Roth Conversions
If your Current Tax Bracket is... | And you expect a Future Tax Bracket of... | Action Recommendation |
10% - 12% | 22% or higher | Typically a good idea to do Roth Conversions |
22% | 22% (or lower) | Typically not a significant financial benefit to converting to Roth |
32% or higher | 24% (or lower) | Usually does not make sense to convert to Roth (prepaying taxes at a premium) |
Complications to Keep in Mind
Taxes aren’t just about ordinary income tax brackets! A Roth conversion can trigger several hidden costs and increase your effective tax rate, depending on the amounts and types of your other income sources.
The Medicare Surcharge Cliff (IRMAA) | A Roth conversion that pushes you $1 over an IRMAA threshold can trigger a $1,000+ annual (per person) Medicare Parts B & D premium increase two years later through Medicare surcharges. |
The Social Security Tax Torpedo | A Roth conversion can make up to 85% of your Social Security benefits taxable. Because each extra dollar of income (such as from Roth conversions) can also make more of your benefit taxable, the effective tax rate can run well above your bracket rate. This is especially true for those in relatively low income ranges where SS could be much more lightly taxed. |
The ACA Subsidy Cliff | For retirees under 65, a Roth conversion can reduce or eliminate ACA health insurance premium tax credits. If you are depending on healthcare subsidies it is important to manage your income to stay below certain thresholds. |
The Net Investment Income Tax (NIIT) | The Net Investment Income Tax is a 3.8% surcharge on some or all investment income for higher income taxpayers. A large IRA conversion may trigger the 3.8% Net Investment Income Tax on some or all of the taxpayer's investment income. |
Phaseout of tax deductions & credits | Roth conversions increase your Adjusted Gross Income which can push you past income thresholds where tax breaks shrink or disappear. |
So when’s the right time?
The best time to do Roth conversions is usually when you’re in a temporary low tax bracket.
Early Retirement Years
These are the years after you stop working and before you claim Social Security, begin RMDs, or enroll in Medicare. If you buy ACA coverage before 65, watch the subsidy thresholds. IRMAA looks at income from two years earlier, so your income at 63 affects your first Medicare premiums at 65.
Example: A couple retires at 60 with $40K in taxable income prior to SS and RMDs. They could convert $50K–$70K of IRA assets per year at a low tax rate (possibly for 10 years if they delay claiming SS until 70), building a tax-free bucket for the future when they expect to be in a higher bracket. Note: this example assumes they don't depend on ACA subsidies. |
Temporary Low-Income Year
Here are a few circumstances when you might have a temporary low-income year:
A year when your business or side-hustle has an unexpectedly low profit, leaving room in a lower tax bracket,
When you transition from one career to another,
When you take a sabbatical,
When you are laid off and looking for work,
When you are on temporary disability,
When you or your spouse is on maternity/paternity leave,
When you go back to graduate school.
Example: A couple in their early thirties decide to have another child. One parent decides to stay home for two years after the baby is born. Their income is cut roughly in half during this time period, from $160,000 to $80,000/year. Depending on their other investment income, they could potentially convert roughly $50K–$55K of IRA assets per year in the 12% bracket for those two years (using 2026 brackets for married couples filing jointly), building a tax-free bucket for the future when they expect to be in a higher bracket. |
Glossary of Key Tax Terms
IRMAA (Income-Related Monthly Adjustment Amount): Surcharges added to Medicare Part B and D premiums for higher-income earners. These IRMAA surcharges can be substantial for higher income households.
NIIT (Net Investment Income Tax): A 3.8% tax on investment income for households exceeding specific income thresholds.
Widow's Tax Trap: The scenario where a widow or widower is subject to higher tax rates when switching from "Married Filing Jointly" to "Single Filer" status because the income thresholds for each tax bracket and the standard deduction are all cut in half, forcing the widow or widower into higher tax brackets despite having slightly lower total household income.
Qualified Charitable Distribution (QCD): A tax-efficient distribution made directly from a traditional IRA to an IRS-registered 501(c)(3) charity by individuals age 70 1/2 or older. QCDs are excluded from income, reducing taxes and IRMAA surcharges while also satisfying some or all of Required Minimum Distributions (RMDs).
The Bottom Line
Roth conversions can be a smart move — but only if the tax math works in your favor.
For higher income, higher net worth readers, my blog post on "When a Roth Conversion Is a Mistake: Tax-Smart Alternatives" has some valuable alternative solutions to doing Roth conversions. This article on "QCDs: The Tax-Smart Way to Give" also provides some insight into Qualified Charitable Distributions which might be a better, lower-cost alternative to doing Roth conversions for those who are charitably inclined.
Need Help Thinking Through Your Roth Conversion Strategy? |
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This post is for general education and is not tax advice. Please consult a qualified tax professional.
Author: John Macy, MBA, RICP®
John Macy is a professional financial coach and the founder of FlourishingPath Financial Coaching. With over six years of experience as a financial coach, John helps pre-retirees and retirees design resilient portfolios and income streams for their next act. Read his full story here.
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