Roth Conversions: The Retirement Tax Strategy Most Investors Wait Too Long to Use

May 1

If there is one tax planning move that separates well-planned retirements from ones built entirely on assumptions, it is the Roth conversion. Done correctly and at the right time, a Roth conversion can reduce your lifetime tax bill by tens of thousands of dollars, protect your heirs from a significant tax liability, and give you more flexibility in retirement. Done at the wrong time, or without modeling the full picture, it can push you into a higher tax bracket, trigger Medicare surcharges, and do more harm than good. Here is what you need to know.

What Is a Roth Conversion?

A Roth conversion is the process of moving money from a traditional IRA or 401(k), where contributions were made pre-tax, into a Roth IRA, where future growth and qualified withdrawals are tax-free. When you convert, you pay ordinary income tax on the amount converted in the year the conversion takes place.

The benefit is that all future growth on that money, and all future withdrawals in retirement, are tax-free for both you and your heirs. You are essentially paying a known tax rate today in exchange for eliminating all future taxes on those dollars.

The Window Most Retirees Miss

The years between retiring and turning 73 represent the most important tax planning window of most people's financial lives. Here is why.

Before retirement, most people are in their peak earning years, paying income taxes at the highest rates they will ever face. After age 73, Required Minimum Distributions (RMDs) from traditional IRAs force taxable income onto your return every year, whether you need the money or not. But the years in between, when work income has stopped and RMDs have not yet started, often represent the lowest-income years a retiree will see for the rest of their life.

That window is when Roth conversions are most powerful. Converting at a 22 or 24 percent marginal rate today protects future dollars from being taxed at potentially higher rates when RMDs arrive. It also reduces the balance that RMDs will eventually be calculated on, creating a compounding benefit over time.

The years between retirement and age 73 are often the lowest-income period a retiree will experience. Converting traditional IRA funds to a Roth during this window locks in today's tax rates and eliminates future required withdrawals from those converted dollars.

A Real-World Illustration

Suppose you retire at 63 with $1.4 million in a traditional IRA and $500,000 in a taxable brokerage account. Your Social Security benefit at 67 will be $3,400 per month. Between 63 and 67, your income is modest and your marginal tax bracket is relatively low.

Converting $80,000 to $100,000 per year from your IRA to a Roth during those years keeps you within a manageable tax bracket while steadily reducing the balance that will eventually be subject to RMDs. By 73, your required distributions are smaller, your tax bill is more predictable, and your heirs inherit a Roth IRA with no income tax obligation. Every dollar converted thoughtfully today is a dollar that will never be taxed again.

How Roth Conversions Interact With Medicare

This is where many advisors get it wrong, and where an integrated tax and investment approach becomes essential.

If you convert too aggressively in a given year, the income from that conversion can trigger IRMAA, the Income-Related Monthly Adjustment Amount, which increases your Medicare Part B and Part D premiums two years later. The IRS uses your Modified Adjusted Gross Income from two years prior to set your Medicare premium each year.

A large Roth conversion at age 63 could meaningfully increase your Medicare premiums at 65. This does not mean you should avoid Roth conversions. It means you should plan them deliberately, with full knowledge of the IRMAA brackets, your projected Social Security income, and your future RMD trajectory. Knowing your IRMAA thresholds each year is part of determining the optimal annual conversion amount.

When Roth Conversions Make the Most Sense

Roth conversions are worth strong consideration in the following situations:

You are in a temporarily lower income year than you expect in the future, such as early retirement before Social Security begins
Tax rates are likely to be higher in the future, whether for you personally or due to broader tax law changes
Your IRA balance is large and projected RMDs will push you into a higher bracket at 73
You want to pass tax-free assets to your children or grandchildren, who would otherwise inherit a taxable IRA
You have cash outside of your IRA to pay the tax on the conversion, rather than using IRA funds to cover the tax bill

When Roth Conversions Are Less Compelling

Converting is generally less advantageous when:

You are currently in your peak earning years and in a high marginal bracket
You have significant charitable giving plans that will reduce your taxable income in later years
Your total IRA balance is modest and future RMDs will not create a meaningful tax burden
A conversion would trigger IRMAA surcharges that outweigh the long-term tax savings

The Role of Integrated Planning

Roth conversion planning is so frequently done wrong, or not done at all, because it sits at the intersection of investment management, tax strategy, and long-range retirement income projection. Most investment advisors do not prepare your tax return and cannot see the full picture. Most accountants are not modeling your retirement income trajectory or your projected RMDs a decade out. Without both perspectives operating in coordination, most people either miss the window entirely or execute conversions that create unintended tax consequences.

At Paragon, investment management and tax preparation are integrated into a single client relationship. That means your Roth conversion strategy is built with your actual tax return, your real portfolio, and your specific retirement income plan in view, every year. We are not making assumptions about your situation. We are working with the actual numbers.

Frequently Asked Questions

Q: Is there an income limit for doing a Roth conversion?

A: No. Unlike direct Roth IRA contributions, which phase out at higher income levels, there is no income limit on Roth conversions. Anyone with a traditional IRA or 401(k) can convert, regardless of income.

Q: Do I have to convert the entire IRA at once?

A: No, and converting everything at once is rarely the right strategy. Partial conversions, converting a specific dollar amount each year to stay within your target tax bracket, are generally more effective. The goal is staying in a manageable bracket while the window is open.

Q: How long does it take for a Roth conversion to pay off?

A: It depends on your tax rate at conversion versus your expected rate at withdrawal, your time horizon, and assumptions about future tax law. A financial planner can calculate your household's break-even point based on your specific situation and timeline.

Q: Can my heirs benefit from a Roth IRA?

A: Yes. Under the SECURE Act, most non-spouse beneficiaries must fully withdraw an inherited IRA within 10 years of the original owner's death. A Roth IRA left to heirs is still subject to this 10-year rule, but withdrawals are generally tax-free, making it a meaningfully more valuable inheritance than a traditional IRA of the same dollar amount.

Q: Can I undo a Roth conversion if I change my mind?

A: No. The Tax Cuts and Jobs Act of 2017 eliminated the ability to reverse (recharacterize) Roth conversions. Once converted, the conversion is permanent, which is another reason to model the decision carefully before executing.

Wondering if a Roth conversion makes sense for your situation? Allen Buckley, CFP®, Managing Partner of Paragon Private Wealth Management in Franklin, Tennessee. Paragon combines investment management with tax preparation through Paragon Tax, giving clients an integrated view of their retirement tax picture. If you have a large IRA and want to understand your Roth conversion opportunity, let's look at the numbers together. Schedule a 30-minute call at paragonpwm.com or call (615) 249-4091.

Advisory services offered through Savvy Advisors, Inc, a SEC registered investment adviser. Paragon Private Wealth Management is a DBA of Savvy Advisors, Inc. Tax services provided through Paragon Tax, a separate and distinct entity from Paragon Private Wealth and Savvy Advisors, Inc.