Roth Conversion Timing in Retirement

A Roth conversion moves money from a traditional IRA or 401(k) to a Roth IRA. You pay income tax on the converted amount now, but future growth and withdrawals are tax-free. The timing and size of conversions can significantly impact your lifetime tax bill.

The Pre-RMD Window: Ages 60-73

The years between retirement and required minimum distributions (RMDs) often present the best opportunity for Roth conversions. During this window, many retirees experience lower taxable income than during their working years or later when RMDs begin.

Why this window matters:

If you wait until RMDs begin, you may find yourself pushed into higher tax brackets with less flexibility to manage your tax situation.

Tax Bracket Management: The Core Strategy

The goal of strategic Roth conversions is to fill up lower tax brackets without pushing into significantly higher ones. The 2024 federal tax brackets for single and married filing jointly are:

Common conversion targets:

• Fill the 12% bracket if you expect to be in 22%+ later
• Fill the 22% bracket if you expect to be in 24%+ when RMDs begin
• Fill the 24% bracket if you have very large traditional balances

The key question: What tax rate will you pay on this money eventually? If you can convert at 22% now but would pay 24% or higher later, the conversion makes sense.

Medicare IRMAA: The Two-Year Look-Back

Medicare Income-Related Monthly Adjustment Amounts (IRMAA) add surcharges to Part B and Part D premiums for higher-income beneficiaries. Roth conversions count as income and can trigger these surcharges.

2024 IRMAA thresholds (based on 2022 income):

Important timing note: IRMAA is based on your tax return from two years prior. A large conversion in 2024 affects your Medicare premiums in 2026.

Annual IRMAA cost example:

If a married couple's conversion pushes them into the first IRMAA tier, each spouse pays an extra $69.90 per month:

• $69.90 × 2 people × 12 months = $1,677.60 additional annual cost

Factor this cost into your conversion decision, but don't let it prevent conversions that make long-term sense.

Conversion Sizing: Partial Conversions Over Multiple Years

Large one-time conversions often push you into higher tax brackets and trigger IRMAA. Spreading conversions across multiple years typically produces better results.

Factors to consider when sizing conversions:

1. Current year income: Social Security, pensions, investment income, part-time work
2. Standard deduction: $14,600 single, $29,200 married filing jointly (2024)
3. Target tax bracket: Usually 22% or 24%
4. IRMAA thresholds: Avoid crossing if the surcharge cost is significant
5. Available cash: You should pay conversion taxes from non-retirement funds

Calculating Your Conversion Amount

Formula: Conversion Amount = Target Bracket Top − Current Taxable Income

Example calculation for married couple:

To fill the 22% bracket (top at $201,050 for married filing jointly): $201,050 − $30,800 = $170,250 available space

However, this would likely trigger IRMAA. A more practical approach: $206,000 (IRMAA threshold) − $60,000 (total income before deduction) = $146,000 maximum to stay below IRMAA

Depending on goals, this couple might choose to convert $50,000-$100,000 annually.

Worked Example: Converting $50,000/Year to Fill the 22% Bracket

The Situation

David and Susan, both age 63, recently retired. They have:

• Combined traditional IRA/401(k) balances: $1,200,000
• Social Security (starting at 67): $48,000/year combined
• Pension: $0
• Taxable investment account: $400,000
• Current annual spending: $80,000

Current Year Tax Situation (Before Conversions)

Conversion Strategy

David and Susan decide to convert $50,000 per year from traditional IRA to Roth IRA for the next four years (ages 63-66).

Year 1 tax calculation:

Federal tax on $35,800:

• 10% on first $23,200 = $2,320
• 12% on remaining $12,600 = $1,512
• Total federal tax: $3,832

Effective tax rate on conversion: $3,832 ÷ $50,000 = 7.7%

Four-Year Conversion Summary

Average tax rate on conversions: 7.7%

Comparison: Without Conversions

If David and Susan skip conversions, their $1,200,000 traditional IRA grows to approximately $1,700,000 by age 73 (assuming 4% annual growth). Their first-year RMD at 73 would be approximately $64,000.

Combined with Social Security of $48,000, their taxable income would be:

• Social Security (85% taxable): $40,800
• RMD: $64,000
• Total: $104,800
• After standard deduction: $75,600 taxable

This puts them solidly in the 22% bracket, with some income taxed at 22%. By converting $200,000 at an effective 7.7% rate, they avoid paying 22% on that money later.

Tax Savings Calculation

Additional benefits:

• Roth growth is tax-free
• No RMDs on Roth accounts (more control)
• Tax-free inheritance for heirs

When Roth Conversions May Not Make Sense

Not everyone benefits from Roth conversions. Consider avoiding or limiting conversions if:

• You expect to be in a lower tax bracket in retirement than now
• You need the converted funds within 5 years (5-year rule applies)
• You would have to pay conversion taxes from retirement accounts (reduces benefit)
• Large conversions would trigger significant IRMAA surcharges
• Your state has high income taxes and you plan to move to a no-tax state

Roth Conversion Planning Checklist

• Calculate your current taxable income including all sources
• Identify the top of your target tax bracket (typically 22% or 24%)
• Determine available conversion room: bracket top minus current taxable income
• Check IRMAA thresholds if you're 63 or older (2-year look-back)
• Estimate the tax cost of your planned conversion
• Verify you have non-retirement funds to pay the tax bill
• Consider state income tax implications
• Project your future tax situation with RMDs and Social Security
• Compare tax rates now versus expected rates later
• Execute conversion before December 31 (no extensions allowed)
• Report conversion on Form 8606 with your tax return
• Track the 5-year holding period for converted amounts