There's a window of opportunity that opens when you stop working and closes when Social Security and Required Minimum Distributions begin. During these years, often your late 50s to early 70s. You may find yourself in the lowest tax brackets of your adult life. This is the Roth conversion window, and using it strategically can save you hundreds of thousands in lifetime taxes.
Understanding the Opportunity
During your working years, your income likely puts you in higher tax brackets, 22%, 24%, 32%, or above. Once you retire but before RMDs and Social Security kick in, your taxable income often drops dramatically.
The typical timeline:
โข Age 55-62: Early retirement possible, no Social Security yet
โข Age 62-70: Social Security available but can be delayed
โข Age 73+: Required Minimum Distributions begin (age 75 starting in 2033)
If you retire at 60 and delay Social Security until 70, you have a decade where your taxable income is largely under your control. This is the conversion window.
How Roth Conversions Work
A Roth conversion moves money from a traditional IRA or 401(k) to a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion, but then grows tax-free forever. Qualified withdrawals in retirement are completely tax-free.
The trade-off: Pay taxes now at known rates to avoid potentially higher taxes later on both the principal and all future growth.
Example: Convert $50,000 from a traditional IRA to a Roth. If you're in the 12% bracket, you pay $6,000 in taxes. That $50,000 then grows tax-free. At 7% growth over 20 years, it becomes $193,000, all tax-free. Without the conversion, you'd owe taxes on the full $193,000 when withdrawn.
๐ ๏ธ Recommended Tool
Schwab's Roth vs. Traditional Calculator helps you model the long-term impact of Roth conversions based on your current tax bracket, expected retirement bracket, and time horizon.
The Tax Bracket Strategy
The key is converting just enough each year to "fill up" lower tax brackets without pushing into higher ones.
2025 Tax Brackets (Married Filing Jointly):
- 10% on income up to $23,850
- 12% on income $23,851 to $96,950
- 22% on income $96,951 to $206,700
- 24% on income $206,701 to $394,600
Example Strategy: A retired couple with $30,000 in pension income could convert approximately $67,000 annually and stay entirely within the 12% bracket. Over 10 years, that's $670,000 converted at just 12%, money that would otherwise be taxed at 22% or higher when RMDs begin.
Why This Matters More Now
Current tax rates may be historically low. The 2017 Tax Cuts and Jobs Act reduced rates, but these provisions are set to expire after 2025. Without congressional action, the 12% bracket reverts to 15%, the 22% bracket to 25%, and so on.
RMDs force taxable income. Once RMDs begin, you must withdraw (and pay taxes on) a percentage of your traditional retirement accounts each year. Large traditional IRA balances can push you into higher brackets whether you need the money or not.
Social Security taxation. Up to 85% of Social Security benefits can be taxable if your income exceeds certain thresholds. Large RMDs can push more of your Social Security into taxable territory.
The Medicare Premium Connection
Income also affects Medicare Part B and D premiums through Income-Related Monthly Adjustment Amounts (IRMAA). Higher income means higher premiums, potentially $500+ more per month for high earners.
Strategic Roth conversions can reduce future RMDs, keeping income below IRMAA thresholds and saving thousands in Medicare premiums annually.
When Roth Conversions Make Sense
Strong candidates for conversions:
- Large traditional IRA/401(k) balances that will generate substantial RMDs
- Years with lower-than-normal income (early retirement, gap years, sabbaticals)
- Expectation of higher tax rates in the future
- Desire to leave tax-free inheritance to heirs
- Long time horizon for the converted funds to grow
Weaker candidates:
- Already in high tax brackets with no lower-income years ahead
- Need the converted funds within 5 years (5-year rule applies)
- Would have to pay conversion taxes from retirement funds (reduces benefit)
- Expect significantly lower tax rates in retirement
๐ Further Reading
The New Retirement Savings Time Bomb by Ed Slott dedicates extensive coverage to Roth conversion strategies. Slott is the nation's leading IRA expert and explains the nuances in accessible terms.
Executing a Conversion Strategy
Step 1: Project your income. Map out expected income sources for each year from now through age 75+, including pensions, Social Security at various claiming ages, RMDs, and investment income.
Step 2: Identify the gap. Find the years where your income is lowest and calculate how much "room" exists in lower tax brackets.
Step 3: Model conversion scenarios. Use tax software or work with a CPA to model the long-term impact of various conversion amounts and timing.
Step 4: Execute systematically. Convert annually, typically in the fourth quarter when you have a clear picture of the year's income. Some advisors recommend converting monthly to dollar-cost average.
Step 5: Pay taxes from non-retirement funds. If possible, pay the conversion taxes from taxable accounts rather than withholding from the conversion itself. This maximizes the amount that grows tax-free.
Common Mistakes to Avoid
Converting too much at once. Pushing into higher brackets defeats the purpose. Spread conversions over multiple years.
Ignoring state taxes. Some states have no income tax; others have rates up to 13%. Factor in state taxes when calculating the true cost.
Forgetting about ACA subsidies. If you're buying health insurance on the ACA marketplace, conversion income counts toward subsidy calculations. A large conversion could cost you thousands in lost subsidies.
Not considering the 5-year rule. Converted amounts must stay in the Roth for 5 years before tax-free withdrawal of earnings. Plan accordingly.
The Zen Take
Roth conversions are one of the most powerful yet underutilized tools in retirement planning. The years between leaving work and starting RMDs represent a unique opportunity, a window that, once closed, never reopens.
The strategy requires patience and discipline: paying taxes now for benefits that may not materialize for decades. But for those with large traditional retirement accounts and years of low income ahead, the math is compelling. You're essentially buying tax-free growth at a discount.
Work with a tax professional to model your specific situation. The optimal conversion amount depends on dozens of factors unique to you. But don't let complexity become an excuse for inaction. The window is finite, and every year you delay is a year of potential tax-free growth lost.