The Roth Conversion Window

You retire at 62. Your paycheck disappears. Required minimum distributions haven't started yet, and maybe you're waiting a few years to claim Social Security. For the first time in decades, your tax return may have a lot less income on it.

Most people look at a low tax bill and think the obvious thing: good. Let's keep it as low as possible.

That makes sense. But there may be another question worth asking during those years: Would it make sense to intentionally pay some tax now?

That's the idea behind a Roth conversion.

Workingthe paycheck fills the returnRetiredbefore Social Security and RMDsSocial Security beginsincome steps back upRequired distributionsthe deferred tax comes due

A schematic, not a projection. Where the window falls, and how low it goes, depends on when Social Security, pensions and required distributions begin for you.

Draw your own window →

01Why retirement can create lower-income years

While you're working, your salary fills up your tax return every year whether you want it to or not. Retirement can change that. The paycheck stops, and depending on when you start Social Security, pensions and other income, there may be a period when your taxable income is considerably lower.

At the same time, you may still have a large amount of money sitting in a Traditional IRA, TSP or 401(k). That money hasn't escaped taxation. The tax was deferred. Eventually, withdrawals from those accounts are generally taxable, and required minimum distributions may force some of that money out later whether you need it for spending or not.

If your income is lower today than you expect it to be later, should you use some of that lower-income year to move money out of a tax-deferred account?

That creates the planning opportunity. If your income is lower today than you expect it to be later, should you use some of that lower-income year to move money out of a tax-deferred account?

02What a Roth conversion actually does

Suppose you're 63 and have $1.2 million in a Traditional IRA. Your pension and other income cover most of what you need, and your taxable income is much lower than it was while you were working.

You decide to convert $50,000 from the Traditional IRA to a Roth IRA. In general, that $50,000 is included in your taxable income for the year of the conversion. You're choosing to pay tax on that money now so it can sit in the Roth instead of the Traditional IRA.

1. 01Convert $50,000From a $1.2 million Traditional IRA to a Roth IRA.
2. 02This year's returnThe $50,000 is included in taxable income for the year of the conversion.
3. 03Inside the RothFuture qualified withdrawals can be tax-free.
4. 04No lifetime RMDsRoth IRAs don't have lifetime required minimum distributions for the original owner.

The example in the text. Hypothetical.

Once it's in the Roth, future qualified withdrawals can be tax-free, and Roth IRAs don't have lifetime required minimum distributions for the original owner.

So you're deliberately making this year's tax bill larger in exchange for potentially reducing taxes and required distributions later.

03Why paying more tax now can sometimes make sense

The instinct is usually to minimize this year's taxes. But the lowest tax bill this year isn't necessarily the lowest tax bill over your retirement.

The lowest tax bill this year isn't necessarily the lowest tax bill over your retirement.

Imagine you have several years after retirement when your taxable income is relatively low. Later, Social Security begins, a pension may be fully underway, and required minimum distributions eventually start. Your income picture can look very different.

A Roth conversion lets you decide whether it makes sense to recognize some income during the lower-income years rather than leaving all of it for later.

That can also reduce the amount remaining in the Traditional IRA, which may reduce future required minimum distributions. It can give you another pool of money to draw from later without creating the same taxable income as a Traditional IRA withdrawal.

But none of that means a conversion automatically saves you money.

04Why a conversion isn't automatically a good idea

A conversion creates a real tax bill today. The question is whether paying that tax now puts you in a better position than leaving the money where it is.

That depends on more than your current tax bracket.

• How much other income do you have?
• When will Social Security start?
• What do you expect future taxable income to look like?
• Could the conversion affect Medicare premiums?
• Where will the money to pay the tax come from?
• Do you expect to leave the account to your children, your spouse or a charity?
• State taxes can matter too.

Even the size of the conversion matters. A $25,000 conversion and a $250,000 conversion can produce very different results on the same tax return.

This is why I don't like the idea of converting simply because someone says, "Taxes are going up," or because you have a few years before RMDs. Those facts alone don't tell you whether the conversion is a good deal.

05How much should you convert?

There isn't one number that works for everyone.

A useful starting point is to project the entire year's income before December 31. Look at wages if there are any, pension income, Social Security, IRA withdrawals, interest, dividends, capital gains and anything else that will show up on the return.

Then look at what happens if you add a conversion. Maybe $20,000 makes sense. Maybe $75,000 does. Maybe the best answer that year is zero.

You're not just asking how much you can convert. You're asking what happens to the rest of the plan when you do.

You're not just asking how much you can convert. You're asking what happens to the rest of the plan when you do.

06Look at the whole retirement, not one tax return

This is where Roth conversion planning gets more useful than simply trying to fill a tax bracket.

A conversion can affect this year's taxes, future required distributions, Medicare premiums, the amount of tax-free money available later and what eventually passes to heirs. Those pieces can pull in different directions.

The goal isn't to make this year's tax bill as small as possible. It also isn't to convert as much as possible before required minimum distributions begin.