Ask most people when they plan to pay taxes on their retirement accounts, and they’ll tell you when they withdraw the money.
That’s how traditional IRAs and 401(k)s are designed to work. You take the tax deduction during your working years, and you pay the tax bill later. But as you get closer to retirement, that deferred tax bill starts to represent a major unknown variable in your plan.
Once you reach age 73, Required Minimum Distributions (RMDs) kick in. At that point, the IRS requires you to take a specific amount out of your pre-tax accounts every year, whether you actually need the cash for daily living expenses or not. Every dollar comes out as ordinary income, which can pull you into higher tax brackets and trigger extra charges on your Medicare premiums.
A Roth conversion offers a way to take back control of that timeline. By moving money from a pre-tax account into a Roth IRA today, you pay the tax now at a known rate. In exchange, those funds grow tax-free, withdrawals are tax-free, and you eliminate RMDs on those assets during your lifetime.
Here is a practical look at how Roth conversions work and where they fit into a long-term strategy.
When Paying Tax Today Improves Flexibility Tomorrow
A Roth conversion near retirement is rarely about saving money in a single year. It’s about managing your overall tax profile over a 10- to 30-year window.
Here are four common scenarios where converting funds makes sense to review with your team:
You Expect Higher Personal Rates Later: If your projected income will rise once Social Security, pensions, and RMDs all stack together, converting pre-tax dollars during lower-income years before age 73 can help manage your long-term exposure.
You Want to Keep Future RMDs Manageable: Large pre-tax balances create large mandatory distributions. Reducing those balances ahead of time gives you more control over your taxable income in your late 70s and 80s.
You Are Planning for a Surviving Spouse: When one spouse passes away, the surviving spouse transitions to filing as a single tax filer. That means the same level of income can quickly push them into a much higher marginal bracket. Converting pre-tax funds while both spouses are alive helps protect the surviving spouse from an unexpected tax burden.
You Plan to Leave an Inheritance: Under current rules, non-spouse beneficiaries generally have to drain an inherited pre-tax IRA within 10 years, often during their own peak earning years. An inherited Roth IRA follows a similar 10-year distribution timeline, but the withdrawals are tax-free to your heirs.
Important Rules and Trade-Offs to Weigh
Roth conversions are not a blanket recommendation for every family. There are real cash-flow and timing considerations to balance before moving forward.
Paying the Tax with Outside Cash: To get the full benefit of a conversion, you want to pay the resulting tax bill using cash from a taxable bank or brokerage account. Using IRA funds to cover the taxes reduces the overall compound growth inside the Roth and can trigger penalties if you are under age 59½.
Medicare Premium Thresholds (IRMAA): Because converted amounts count as taxable income in the year of the transfer, a large conversion can temporarily bump your income over Medicare thresholds, leading to higher Part B and Part D premiums two years down the road.
The Five-Year Clock: Each converted amount has its own five-year waiting period before you can access the converted principal penalty-free if you are under 59½. While this rule is less restrictive once you pass 59½, timing still matters within your income plan.
Building a Multi-Year Conversion Window
Instead of asking whether you should convert your entire account at once, a more realistic approach looks at partial conversions spread over several years.
The ideal window often opens between the day you retire and the day you start taking Social Security or mandatory RMDs. During these years, your earned income drops, placing you in a lower tax bracket.
A structured approach involves:
Mapping out your expected income and tax brackets through your mid-70s.
Identifying low-income years where you have available room in your target tax bracket.
Calculating an annual conversion amount that keeps you below Medicare surcharge limits.
Revisiting the numbers each fall to adjust for market performance and tax updates.
Taking action early gives you more options while time is still on your side.
If you’re interested in reviewing your pre-tax accounts to see if a Roth conversion fits your goals, we’d love to talk. You can read more about our approach to tax planning or reach out to set up a conversation with our team today.
Frequently Asked Questions
-
Converting now lets you lock in your current, known tax rate on pre-tax assets. Once moved to a Roth IRA, those funds grow tax-free and are exempt from Required Minimum Distributions during your lifetime.
-
A conversion increases your modified adjusted gross income for that tax year. If that increase pushes you above specific income thresholds, it can trigger an Income-Related Monthly Adjustment Amount (IRMAA) surcharge on your Medicare Part B and Part D premiums two years later.
-
No. In fact, most strategies rely on partial conversions spread over multiple tax years. This allows you to convert assets gradually without jumping into a higher tax bracket or triggering unintended surcharges.
Disclosure: All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). Savvy Wealth Inc. (“Savvy Wealth”) is a technology company and the parent company of Savvy Advisors. Savvy Wealth and Savvy Advisors are often collectively referred to as “Savvy”. The Retirement Studio is used for marketing purposes only. The Retirement Studio is not a separately registered investment advisor.
