Roth Conversion Before Retirement: When It Makes Sense and When It Doesn't

Let’s say you are 59 with $1.4 million in a traditional IRA and almost nothing in Roth. You’ve done everything right for 25 years. Maxed your 401k, stayed invested, even paid off your house early. On paper everything looks great.

The problem is sitting quietly in that $1.4 million. At 73, required minimum distributions would force you to pull roughly $55,000 per year out of that account whether you needed the money or not. Stacked on top of Social Security and your spouse’s pension, those RMDs were going to push you into a higher bracket than you’ve ever been in while working.

A Roth conversion strategy can help take a significant bite out of that tax problem.

Most people don't think about this until it's almost too late to do anything about it.

What a Roth Conversion Does

You move money from a traditional IRA or 401k into a Roth IRA. You pay ordinary income tax on whatever you convert that year. From that point on, the money grows tax-free and comes out tax-free in retirement (there are a few 5-year rules to follow, however).

The tradeoff is simple: pay tax now at a rate you choose, rather than later at a future unknown rate the IRS imposes when RMDs begin.

Whether it's worth doing depends almost entirely on one question: will your tax rate be higher, lower, or about the same in the future than it is right now? If you'll be in a higher bracket in retirement, converting now makes sense. If you'll be in a lower bracket, it probably doesn't.

Timing Matters

For most people, the best years to do Roth conversions are the ones between retirement and when Social Security and RMDs begin. Income is lower in those years than at any other point in your adult life. You can deliberately convert into lower brackets at rates you'll likely never see again.

Miss that window and you're converting on top of Social Security, pensions, and RMDs, which means paying at a higher rate than you had to.

If you're still working at peak income, the math usually doesn't work. Converting a large amount on top of a $250,000 W-2 means paying 32% or more on every dollar (assuming a single tax filer). That's a hard case to make.

Three Things I Look at Before Recommending a Conversion

First: what bracket are you in now versus what bracket might you be in at 73? If current rates are lower, converting has some great potential for you. If they're higher, it doesn't.

Second: do you have money outside the IRA to pay the tax? Paying the conversion tax by pulling from the IRA itself should be avoided, if possible. It reduces the amount converted that stays invested, potentially triggers a penalty if you're under 59.5, which would undercut the whole reason you're doing it.

Third: what do projected RMDs actually look like? Sometimes the number is manageable and what you might be withdrawing anyway, so conversions are less urgent. Sometimes it's $100,000 a year at 73 and we need to start working on it immediately since it only goes up from there.

Partial Conversions Are Often Better Than Large Ones

You don't have to convert everything at once. Converting just enough each year to fill up a targeted tax bracket without crossing into the next one is usually more efficient than a large one-time conversion that bumps you into the next tax bracket (or two!).

Spreading conversions over five or ten years also reduces the risk of crossing IRMAA Medicare thresholds, which can add hundreds per month to Medicare premiums two years after a high-income year.

The goal isn't to avoid all taxes on retirement accounts. It's to control when you pay them and at what rate. Done well, a multi-year Roth conversion strategy reduces your total lifetime tax bill. Not just this year's bill.

When It Doesn't Make Sense

If you're in your peak earning years with no near-term plan to retire, adding Roth conversions to your already high income usually costs more than it saves. Wait for the lower-income years.

If the only money you have to pay the conversion tax is sitting inside the IRA, it may not the right time. It’s much more effective if outside funds are used to cover the tax on the conversion.

I'm a fee-only CFP in Pleasant Grove, Utah. If you're within ten years of retirement and want to look at your specific Roth conversion window, book a free intro call below.