Roth Conversions in Retirement: Who They Help and Who They Don't

A Roth conversion moves money from a traditional IRA or 401(k), where withdrawals are taxed as income, into a Roth IRA, where qualified withdrawals are tax-free. You pay income tax on the amount converted in the year you convert. The question is never whether Roth accounts are good. It is whether paying tax now, at today's rate, is cheaper than paying it later, at whatever rate applies then.

The window most people miss

For many retirees there is a stretch of years, from the day they stop working until required minimum distributions begin, when their taxable income is lower than it has been in decades. Social Security may not have started. The paycheck is gone. The IRA is sitting untouched. That stretch is when conversions tend to make the most sense, because the converted dollars can be taxed in the lower brackets that would otherwise go unused.

Required minimum distributions start at age 73 for people born between 1951 and 1959, and at 75 for people born in 1960 or later. Once they start, the IRA forces income onto your return whether you need it or not, and the window closes.

Three things a conversion can affect that people forget

Medicare premiums. Medicare Part B and Part D premiums rise for people above certain income levels, based on your tax return from two years earlier. A large conversion at 63 can raise your Medicare premium at 65. The surcharge is a cliff: one dollar over a threshold triggers the full step up for that year.

Social Security taxation. Up to 85% of your Social Security benefit becomes taxable as your other income rises. A conversion in a year when you are already drawing Social Security can pull more of the benefit into taxable income.

State tax. In Colorado, conversions count as retirement income for the pension and annuity subtraction, and for people 55 to 64 a conversion can push adjusted gross income past the line that qualifies Social Security for the full state subtraction. See our article on how Colorado taxes retirement income.

Who a conversion usually helps

People with large pre-tax balances relative to their spending, so that required distributions would push them into higher brackets later. People who expect to leave the IRA to children, since heirs must now empty an inherited IRA within ten years, often during their own peak earning years. Couples who want to protect the surviving spouse, who will file as a single taxpayer with narrower brackets after the first death. And people who believe tax rates are more likely to rise than fall.

Who it usually doesn't help

People who will be in a lower bracket in retirement than they are now. People who would have to pay the conversion tax from the IRA itself rather than from savings, which shrinks the amount that ends up in the Roth. People planning to give the IRA to charity, since qualified charitable distributions already avoid the tax. And anyone converting so much in one year that it lands them in a bracket higher than the one they were trying to avoid.

How we approach it

We do not recommend a single large conversion. We map out expected income year by year through retirement, find the years with room in the lower brackets, and fill that room, watching the Medicare and Social Security thresholds in each year. The result is usually a schedule of smaller conversions over several years rather than one decision. You can see where you stand with our Roth conversion calculator, and we go through the full schedule in a planning meeting.

Tax rules change; consult a tax professional about your situation. This article is for general education only and is not investment, tax, or legal advice. Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC-registered investment adviser. Investments involve risk, including possible loss of principal.