When Should You Do Roth IRA Conversions?

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.

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, don’t do 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.

✅ Never convert at a higher rate than what you would pay later on withdrawals.

👉 Example: Don’t pay 32% now to avoid paying 24% later. That’s going backward.

✅ 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%).  And avoid the large tax bracket jumps (from 12% → 22% and from  24% → 32%).

✅ Keep in mind the ‘Widow’s Tax’.

After one spouse passes away, the survivor files as single instead of married, 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.

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.

⚠️ Social Security Taxation:  More of your benefits become taxable as income rises.

⚠️ Medicare IRMAA Premiums:  At age 65+, higher income from conversions can increase your monthly Medicare costs—sometimes by thousands per year. And remember: Medicare looks back 2 years to determine your premiums (i.e., your income in 2024 is used to determine your Medicare Part B & D premiums in 2026).

⚠️ Net Investment Income Tax (NIIT):  At higher incomes, a 3.8% surtax kicks in on investment income. Roth conversions can trigger NIIT.

⚠️ Phaseouts of Deductions & Credits:  Roth conversions can push you past income thresholds where tax breaks shrink or disappear.

⚠️ Healthcare Subsidies (Pre-65 Retirees):  More income can mean losing valuable Obamacare premium subsidies. If you are depending on healthcare subsidies it is important to manage your income to stay below certain thresholds.

So when’s the right time?  

Usually when you’re in a temporary low tax bracket:

👉 Early Retirement Years:  The years of retirement before Social Security and RMDs, and especially before Medicare begins. But, remember that Medicare IRMAA surcharges are based on income from 2 years prior, so the year you turn 65 Medicare will use your Modified Adjusted Gross Income from when you were 63 to determine your Medicare Part B and D premiums.

👉 Low-Income Year:  A year when your business or side-hustle has an unexpectedly low profit, leaving room in a lower tax bracket.  Or when transitioning from one career to another, taking a sabbatical, are laid off, on maternity/paternity leave, or go back to graduate school.

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 “Roth Conversions — Not the Best Solution for Many Households” has some valuable alternative solutions to doing Roth conversions. My blog post on "QCDs: A 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.

If you would like friendly, expert assistance in thinking through how much and when Roth conversions makes sense for you please contact me or visit www.flourishingpathfinancial.com/book-online to set up a free Discovery Session with me.

Author:  John Macy, MBA, RICP®

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