Key Takeaways
- A conversion moves pre-tax IRA money to a Roth; you pay income tax now and never again on that money or its growth.
- Conversions win when today's tax rate is lower than the rate you expect later; low-income years are the golden windows.
- Convert in slices to fill low brackets, and mind side effects on Medicare premiums and ACA subsidies.
A Roth conversion moves money from a traditional, pre-tax retirement account into a Roth account. You add the converted amount to this year's taxable income and pay tax on it now; in exchange, that money and all its future growth come out tax-free in retirement, with no required minimum distributions during your lifetime.
Whether that trade wins comes down to one comparison: the tax rate you pay on the conversion versus the rate you would otherwise pay when the money eventually comes out. When today's rate is lower, converting wins. The craft is in spotting the years when that is true and sizing the conversion correctly.
The Years Conversions Shine
Golden windows share one trait: unusually low taxable income. The classic is early retirement, after the paycheck stops but before Social Security and required minimum distributions begin, when a couple can have surprisingly little taxable income for five or ten years. Other windows: a sabbatical or job gap, a business loss year, the year after a big charitable deduction, or early career before income takes off.
In those years, brackets that would normally be out of reach sit empty. Converting enough to fill the 10%, 12%, and sometimes 22% brackets buys tax-free status at rates you may never see again.
Sizing: Fill Brackets, Respect Cliffs
Conversion sizing is bracket arithmetic. Project your taxable income, see where you sit in the bracket table at irs.gov, and convert up to the top of your chosen bracket, not past it. Then check the cliffs that sit off to the side: Medicare IRMAA surcharges keyed to income from two years prior, ACA premium subsidies for early retirees, and taxation of Social Security benefits. A conversion that saves 5% in bracket rate but triggers a Medicare surcharge can be a wash.
Conversions are irreversible since 2018, so size with a margin of safety and convert late in the year when your income picture is clear.
Try it: the free The Wealth Checkup takes a couple of minutes and shows you where you stand. Or explore tax planning at Attend.
Paying the Tax, and the Five-year Rule
Pay conversion tax from cash outside the retirement account. Using IRA dollars to pay the tax shrinks the amount getting tax-free treatment and can add penalties before 59½. Each conversion also starts its own five-year clock for penalty-free access to that principal before 59½, which matters for early retirees building a "conversion ladder" of sequential annual conversions to fund their fifties and early sixties.
Where Conversions Fit a Bigger Plan
Conversions interact with everything: they shrink future required distributions, which can lower lifetime taxes and Medicare premiums; they leave heirs tax-free accounts instead of taxable inheritances under the 10-year distribution rule; and they pair with charitable strategy, since big-deduction years are cheap conversion years. That is why we model conversions over decades, not single years, inside tax planning and retirement planning engagements.
If you want a quick read on whether your accounts are positioned well, start with the Wealth Checkup.
Frequently Asked Questions
Do Roth conversions have income limits?
No. Anyone can convert any amount regardless of income. The income limits apply only to direct Roth IRA contributions, which is why the backdoor Roth strategy exists.
Can I undo a conversion if my income spikes?
No. Recharacterization of conversions was eliminated in 2018. Convert with a margin of safety, ideally late in the year when your income is largely known.
Does a conversion trigger the 10% early withdrawal penalty?
The conversion itself does not, at any age. But converted principal withdrawn within five years of its conversion, before age 59½, can be penalized, and paying the conversion tax from IRA funds can be too.
Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend
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