Roth Conversion Strategies: The Art of Paying Taxes Now to Save More Later

Let me tell you about Michael and Diane.

They retired at 62 with $1.2 million in Traditional IRAs. For the next 10 years, they had relatively low income — just enough from a small pension and part-time consulting to cover living expenses. They didn't need their IRA money yet.

Their accountant suggested Roth conversions, but they hesitated. "Why pay taxes now when we don't have to?"

They waited. At 73, RMDs kicked in. Their first required distribution was $47,000. Combined with Social Security, their income crossed the IRMAA threshold — Medicare premiums jumped by $2,400 per year. Worse, 85% of their Social Security became taxable.

Now in their late 70s, their annual tax bill is $28,000 — more than double what it was at 65.

Here's the painful irony: during those 10 years of low income (ages 62-72), Michael and Diane could have converted $50,000 per year at the 12% tax rate. Total cost: $60,000 in taxes. That would have moved $500,000 from their Traditional IRA to a Roth — eliminating RMDs on that money, avoiding Medicare surcharges, and creating tax-free income for life.

Instead, they'll pay over $100,000 more in taxes across their retirement.

This is why Roth conversion strategy matters. It's not just about whether to convert — it's about how much, when, and in what sequence.

The Traditional IRA problem

Here's what happens when you do nothing with a large Traditional IRA.

The account keeps growing tax-deferred, which sounds good until you realize that every dollar of growth increases your future tax burden. At 73, the IRS forces you to start withdrawing — whether you need the money or not. These Required Minimum Distributions start at roughly 4% of your balance but grow each year as a percentage. By 85, you're required to withdraw over 6%. By 90, nearly 9%.

These mandatory withdrawals stack on top of your other income. Social Security, pensions, investment income — all of it. The combined total determines your tax bracket. For many retirees, RMDs push them from comfortable 12% territory into the 22% bracket or higher.

But the damage doesn't stop at income taxes. Higher income makes up to 85% of Social Security taxable, creating the "tax torpedo" effect where each dollar of IRA withdrawal can make $1.85 of income taxable. Higher income triggers IRMAA surcharges on Medicare premiums — potentially $5,000 or more annually for a couple. And when you die, the SECURE Act forces your heirs to empty the inherited IRA within 10 years, potentially at their peak earning years when they're in the highest brackets.

The Roth solution addresses each of these problems. Money in a Roth has no Required Minimum Distributions — you withdraw when you want, not when the IRS demands. Withdrawals don't count toward taxable income, don't affect Social Security taxation, don't trigger IRMAA. And when your heirs inherit, the 10-year rule still applies, but withdrawals are completely tax-free.

The foundation: filling your tax bracket

Tax brackets work like buckets that fill with income. Your first dollars of income go into the 10% bucket. Once that's full, additional income spills into the 12% bucket. Then 22%, 24%, and beyond.

The key insight is that empty space in a low-rate bucket represents a wasted opportunity. If your taxable income only fills your buckets to the 12% level with room to spare, that remaining space disappears at midnight on December 31. It doesn't carry forward. It's gone.

For married couples filing jointly in 2024, the 12% bracket holds income from $23,200 to $94,300 — a $71,100 span taxed at just 12%. That's a remarkably low rate for substantial income. And the jump to 22% represents the biggest percentage increase in the entire bracket structure — nearly doubling your marginal rate.

The bracket-filling strategy is simple in concept: convert enough Traditional IRA money to Roth each year to fill your current bracket to the brim, but not overflow into the next one.

Picture Karen and Steve, a retired couple with $30,000 from a pension, $18,000 in taxable Social Security, and $12,000 in investment dividends. Their total taxable income is $60,000. The 12% bracket ceiling sits at $94,300. That leaves $34,300 of room — space they can fill with a Roth conversion at just 12% federal tax.

They convert $34,000, paying about $4,100 in federal taxes. That money now grows tax-free forever. Future withdrawals won't add to their taxable income, won't make Social Security more taxable, won't trigger IRMAA. And when they die, their children will inherit tax-free.

The math compounds over years. Ten years of $34,000 conversions moves $340,000 to Roth, all at 12% rates. That's roughly $41,000 in total conversion taxes for $340,000 of permanent tax shelter.

The multi-year conversion plan

Single-year thinking leads to suboptimal results. Roth conversions work best as a multi-year strategy, with each year's conversion informed by past decisions and future projections.

Consider someone who retires at 60 with a $1,000,000 Traditional IRA, plans to start Social Security at 70, and expects moderate investment income in the meantime. The decade from 60 to 70 represents a golden conversion window — income is low, brackets are accessible, and every dollar converted now is a dollar shielded from future RMDs.

The approach isn't to convert everything immediately. Converting $1 million in a single year would push income through every bracket up to 37%, paying far more in taxes than necessary. Instead, the strategy involves converting enough each year to fill the 12% bracket, possibly extending into the 22% bracket depending on projections, while reserving larger conversions for years with unusually low income.

A 10-year conversion plan might look something like this: Years 1-5, convert $75,000 annually, staying at the edge of the 12%/22% boundary. Years 6-10, as Social Security begins and adds to taxable income, reduce conversions to $50,000 annually to stay in lower brackets. Total converted over the decade: $625,000 or more, mostly at 12-22% rates.

Compare that to no conversions: the same person at age 73 faces RMDs on a larger balance (now grown to perhaps $1.5 million), combined with full Social Security, potentially pushing them into the 24% bracket while also triggering IRMAA and maximizing Social Security taxation.

The multi-year approach almost always wins when you run the numbers.

Timing around life events

Certain life situations create exceptional conversion opportunities — periods when taxable income drops temporarily, making conversions unusually cheap.

Early retirement before Social Security starts is the classic window. If you retire at 60 and delay Social Security until 70, you might have a decade with minimal taxable income. Those years represent conversion gold — fill the low brackets while you can.

A job loss or career transition, while unwelcome, creates the same opportunity. If your income drops dramatically for any reason, consider whether conversions could productively fill your bracket space. You're paying taxes at low rates on money that would otherwise be taxed at higher rates later.

Moving from a high-tax state to a low-tax state opens a different kind of window. If you're retiring from California (13.3% top rate) to Florida (0%), do your conversions after establishing Florida residency. You'll pay federal taxes but skip the state bite entirely — potentially saving 10% or more on every converted dollar.

The year of a spouse's death offers one final year of Married Filing Jointly brackets. This sounds morbid, but the financial reality is significant. Aggressive conversions that year lock in the wider MFJ brackets before the surviving spouse shifts to narrower Single filer brackets permanently. It's an act of protection for the surviving spouse.

Conversely, avoid conversions in high-income years — years with large capital gains, significant business income, final working years at peak salary. The same conversion that costs 12% in a low-income year might cost 32% or more in a high-income year. Patience pays.

The IRMAA factor

Medicare premiums increase at specific income thresholds, and Roth conversions can trigger these surcharges in ways that surprise people.

For married couples filing jointly in 2024, the first IRMAA threshold sits at $206,000 of modified adjusted gross income. Stay below it, and you pay standard premiums. Cross it by even a dollar, and both spouses pay roughly $70 more per month for Part B plus $13 more for Part D — about $2,000 per year as a couple.

The trick is the two-year lookback. Your 2024 MAGI determines your 2026 premiums. A conversion you do this December affects Medicare costs you'll pay starting in 26 months.

This creates a planning challenge. A conversion that fills the 22% bracket might push MAGI from $190,000 to $210,000, triggering $2,000 in annual IRMAA surcharges. Is the conversion still worth it? Usually yes — the long-term tax savings exceed the IRMAA cost. But sometimes the math suggests staying just below the threshold, particularly if you're only slightly in conversion territory.

The key is calculating before converting, not discovering the IRMAA impact afterward. And if you do cross an IRMAA threshold, cross it decisively — going $5,000 over costs the same as going $50,000 over until you hit the next tier.

Converting for your heirs

Under the SECURE Act, most non-spouse beneficiaries must withdraw inherited IRAs within 10 years. This changes the legacy calculation dramatically.

If your adult children inherit a $1 million Traditional IRA, they must withdraw roughly $100,000 or more per year on top of their own income. If they're in their peak earning years — ages 40-55, established careers, highest salaries — those forced withdrawals might be taxed at 32% or higher. A $1 million inheritance could shrink to $650,000 after taxes.

But if you convert during your lifetime, paying taxes at your lower retired-person rates, your heirs inherit Roth money. They still face the 10-year withdrawal requirement, but every dollar comes out tax-free. A $700,000 Roth inheritance (after you paid conversion taxes) delivers more after-tax value than a $1 million Traditional IRA inheritance taxed at your children's rates.

This calculation matters most for retirees with more assets than they'll spend, those whose children earn high incomes, and anyone focused on maximizing what they pass on. The conversion taxes you pay now are essentially a gift to your heirs.

The Roth conversion ladder for early retirees

If you're retiring before 59½ and need to access retirement funds, the Roth conversion ladder provides a penalty-free path.

Here's how it works: Each year, you convert an amount from Traditional to Roth and pay regular income taxes on the conversion. You wait five years. After five years, that specific conversion can be withdrawn from the Roth tax-free and penalty-free, regardless of your age.

The "ladder" develops over time. In Year 1, you convert $50,000. In Years 1-5, you live on taxable savings or other funds. In Year 6, your Year 1 conversion becomes accessible — $50,000 available penalty-free. Each subsequent year, another rung of the ladder becomes available.

This strategy requires planning ahead and having five years of expenses in accessible accounts to bridge the gap. But for those retiring at 50 or 55, it's the most tax-efficient way to access retirement funds before 59½.

Common conversion mistakes

Several errors commonly undermine conversion strategies.

Converting based on account balance rather than tax bracket wastes money. "I'll convert $100,000 because it's a round number" ignores whether your taxable income can absorb $100,000 at acceptable rates. Convert based on bracket math, not arbitrary amounts.

Ignoring state taxes changes the calculus significantly. A 10-13% state tax rate effectively adds that amount to your federal rate. Some states don't tax conversions at all. Know your state's treatment before deciding.

Converting in December without margin creates risk. If markets rise between your conversion and year-end, your tax bill increases. Leave buffer or convert earlier in the year when you have more visibility into the year's total income.

Forgetting about ACA subsidies devastates early retirees on marketplace insurance. Conversion income counts toward MAGI for ACA purposes. A conversion that looks smart for long-term tax planning might eliminate $10,000+ in annual healthcare subsidies. Run both calculations.

Not coordinating with RMDs wastes opportunities. You cannot convert your RMD — you must take it first as ordinary income. But after satisfying the RMD, you can convert additional amounts. Many retirees stop at the RMD, missing the chance to convert beyond it.

Partial versus full conversions

Almost everyone should favor partial conversions over full conversions.

Partial conversions let you control exactly which bracket you fill, spread the tax bill across years, adjust strategy as tax laws change, and manage IRMAA thresholds with precision. You're not locked into a single-year decision.

Full conversions — converting an entire Traditional balance at once — only make sense in narrow circumstances: a year of zero or very low income, imminent move to a high-tax state, very small Traditional IRA balances where spreading doesn't matter, or strong conviction that tax rates will rise dramatically.

For most retirees, the systematic approach works better: convert annually, fill the brackets you're comfortable with, and adjust each year based on changing circumstances.

Making it work for you

Roth conversions aren't just a tax tactic — they're a fundamental retirement planning strategy. The key is converting at today's low rates to avoid tomorrow's potentially higher rates.

Start planning years before retirement if possible. Run the numbers annually — your optimal conversion amount changes as income, account balances, and tax laws evolve. Consider the full picture: federal brackets, state taxes, IRMAA thresholds, ACA subsidies, Social Security taxation, and legacy goals.

Michael and Diane's story doesn't have to be yours. The decade they wasted is the decade you can use. The taxes they're paying now are the taxes you can avoid.

The window closes eventually — at 73, RMDs begin whether you've prepared or not. The question is whether you'll enter that phase with most of your money in Traditional accounts (taxable), or with a substantial Roth balance (tax-free).

That's the choice Roth conversion strategy is really about.

Need a personalized Roth conversion strategy? Connect with a retirement advisor who can model multiple scenarios and create an optimized multi-year plan.