Roth Conversions in Retirement: When Lower-Income Years Create an Opportunity
Hi friends,
One of the interesting things that can happen after retirement is that your income may suddenly look very different. You may have spent years earning a salary and building a 401(k) or IRA, then retire and find yourself with a few years when your taxable income is much lower than it was while you were working.
Those years can be valuable.
I often think of them as a window. Before required minimum distributions begin, and sometimes before Social Security or pension income fills the tax return back up, you may have more choice about when taxable retirement income shows up. That is where a Roth conversion can be worth a closer look.
Quick Summary
A Roth conversion moves money from a pre-tax retirement account into a Roth account. You pay ordinary income tax on the amount converted in the year you do it, but the money can then grow tax-free and generally is not subject to lifetime required minimum distributions for the original owner.
The strategy is not about converting everything. The real question is whether you have a lower-income year when paying some tax intentionally could make more sense than waiting until future RMDs and other retirement income push your taxable income higher.
Why Lower-Income Years Can Matter
Retirement does not always mean your taxable income stays the same from one year to the next.
Someone might retire in their early or mid-60s, stop receiving wages, delay Social Security for a while, and still be several years away from required minimum distributions. Suddenly, there may be a gap when taxable income is much lower than it was during the working years and may be lower than it will be later.
That can create choices.Instead of automatically leaving every dollar in a traditional IRA until RMDs begin, it may make sense to look at whether converting a portion to Roth during one of those lower-income years could be useful.
The idea is simple: if you are going to pay tax on that money eventually, is there an opportunity to pay some of it during a lower-tax year rather than waiting for a potentially higher-tax year later?
That is a planning question, not a rule.
What a Roth Conversion Actually Is
A Roth conversion is different from making a Roth contribution.
A contribution is new money you put into a Roth account, and annual contribution limits and income restrictions may apply. A conversion moves money you already have in a traditional IRA or other eligible pre-tax retirement account into a Roth account.
There is no annual dollar limit or income limit on Roth conversions. Someone who earns too much to make a direct Roth IRA contribution may still be able to complete a conversion.
The tradeoff is that the amount converted is generally added to your taxable income for that year.
That is why the amount matters.
The Goal Is Not to Convert as Much as Possible
One of the easiest mistakes to make with Roth conversions is assuming that if some is good, more must be better.
It doesn't work that way.
A conversion can push part of your income into a higher tax bracket. It can affect Medicare premiums. It can change how other deductions or tax benefits work. The right amount may be very different from one person to another and from one year to the next.Sometimes the useful approach is to convert only enough to use part of a lower tax bracket without pushing too far into the next one.
You may hear this called “bracket filling.” In plain English, it means looking at how much taxable income you already have and asking whether there is room to add some conversion income at a tax rate that still makes sense.
That requires an actual tax projection. Guessing is not enough.
Before RMDs Begin, You May Have More Choice
This is where Roth conversions connect directly to the retirement “tax bomb” conversation.
Before required minimum distributions begin, you generally have more control over when taxable retirement income comes out. Once RMDs begin, the IRS requires a minimum amount to be withdrawn each year.
If you are already subject to RMDs, those distributions come first. You generally must take the full required amount for the year before completing a Roth conversion, and the RMD itself cannot be converted.
That does not mean Roth conversions stop being useful once RMDs begin. It does mean the planning window can become narrower.
If you want a refresher on how RMDs work, our Required Minimum Distributions: The Basics Every Retiree Should Know article walks through the rules and some of the common issues to watch for.
A Few Roth Conversion In Retirement Rules Worth Knowing
There are several details that matter before you make a conversion.
First, a Roth conversion generally can't be undone. Since 2018, the rules no longer allow you to reverse a completed Roth conversion through recharacterization. That is another reason to model the amount before you move the money.
Second, the pro-rata rule can matter if you have both pre-tax and after-tax money in traditional, SEP, or SIMPLE IRAs. The IRS looks at those IRA balances together when determining what portion of a conversion is taxable. You generally cannot choose to convert only the after-tax dollars and ignore the rest.
Third, if you are younger than 59½, each conversion can have its own five-year holding period before the converted amount can be withdrawn without an additional penalty. This is one of those rules where the details matter, especially if you expect to need the money soon.
And when possible, paying the tax from money outside the retirement account can allow the full converted amount to remain invested in the Roth. Whether that makes sense depends on the rest of your finances.
Do Not Forget the Ripple Effects
The tax on the conversion itself is only part of the picture.
A larger conversion increases your modified adjusted gross income for the year. For retirees, that can affect Medicare Part B and Part D premiums because Medicare generally looks back two years when determining whether higher-income surcharges apply.
A conversion can also affect other deductions and tax benefits that phase out as income rises.
For people age 65 and older, that includes the temporary senior deduction available under current law. A larger conversion may reduce or eliminate some of that deduction depending on income.
None of this automatically makes a Roth conversion a bad idea. It simply means the right conversion amount should be considered alongside the rest of the tax return, not in isolation.
What About the Money Your Heirs Eventually Receive?
This is not the main reason everyone should consider a Roth conversion, but it can be an additional benefit.
Most non-spouse beneficiaries who inherit a traditional IRA generally have to withdraw the account within ten years, and those withdrawals are usually taxable income to them. That can be especially important if your children inherit the account during their own highest-earning years.
Every dollar converted to Roth is one less dollar left in the pre-tax account.
A Roth account generally passes to beneficiaries without income tax on qualified withdrawals, although inherited Roth accounts are still subject to distribution rules.
That means a conversion can change not only your own future tax picture, but also the after-tax value of what your heirs eventually receive.
When Is a Roth Conversion Worth a Closer Look?
This is especially worth discussing if you have recently retired and your taxable income has dropped, if you have a few years before RMDs begin, or if you have a substantial traditional IRA or 401(k) that is likely to keep growing. It may also be worth looking at if you are thinking about what your children or other beneficiaries may eventually inherit.
You do not need an enormous retirement account for the conversation to matter. The question is whether there is a period when your current tax rate may be lower than the rate you could face later.
Sometimes the answer will be yes. Sometimes the taxes created by the conversion, Medicare effects, or other considerations will make it less attractive.
That is why this is something to calculate rather than assume.
What to Do Next
If you are in the early years of retirement and your taxable income has dropped, take a look before that window closes.
Apple Blossom Tax Service or your tax professional can compare your current income with future Social Security, pension income, and projected RMDs and help you see whether a partial Roth conversion is worth considering.The goal is not to move money just because a strategy exists. It is to understand whether you have a useful opportunity now that may not be there later.
We want to be proactive, not reactive.
Warmly,
Melissa OchoaEnrolled Agent & Owner, Apple Blossom Tax ServiceServing Sebastopol and Sonoma County
Frequently Asked Questions
What is a Roth conversion?
A Roth conversion moves money from a pre-tax retirement account into a Roth account. The amount converted is generally taxable income in the year of the conversion.
Is there an income limit for Roth conversions?
No. Roth conversions do not have the same income limits that apply to direct Roth IRA contributions.
Why can early retirement be a good time for a Roth conversion?
Some retirees have several years when wages have stopped but Social Security and RMDs have not yet begun. That can create a lower-income period when a conversion may be taxed at a more favorable rate.
Do I have to convert my entire IRA?
No. Partial Roth conversions are common. The amount should be based on your income, tax bracket, Medicare considerations, and other tax factors.
Can I undo a Roth conversion if I change my mind?
No. Roth conversions generally cannot be reversed once completed, which is why it is important to plan the amount before making the move.
Can I convert my RMD to a Roth account?
No. If you are subject to required minimum distributions, you generally must take the RMD first. The RMD itself cannot be converted.
Will a Roth conversion increase my Medicare premiums?
It can. A conversion increases your income for the year, and Medicare generally uses a two-year lookback when determining higher-income Part B and Part D premiums.
Can a Roth conversion help my heirs?
Potentially. Converting money reduces the amount left in a traditional IRA that beneficiaries may later have to withdraw as taxable income. Whether that benefit outweighs the tax you pay today depends on your specific situation.
How can Apple Blossom Tax Service help?
Every family's situation is different. During a Tax Consulting & Optimization Session, we can review your inherited IRA, discuss the potential tax implications of when to cash in, and help you understand your options before you make a final decision.
Warmly,
Melissa Ochoa
Enrolled Agent & Owner, Apple Blossom Tax Service
Serving Sebastopol and Sonoma County
