Should I Do a Roth Conversion Before Retirement?

If most of your retirement savings sit in a 401(k), 403(b), 457, or traditional IRA, you've probably heard you should "do Roth conversions." Maybe. For some couples it's one of the best tax moves they'll ever make. For others it just means paying tax early for no reason. Here's how I think it through with clients.

What a Roth conversion is

A Roth conversion moves money from a pre-tax account into a Roth IRA. You pay income tax on the amount you convert, in the year you convert it. After that, the money grows tax-free, and qualified withdrawals are tax-free too. Roth IRAs also have no required minimum distributions for the original owner.

In plain terms: you're choosing to pay tax now, at a rate you know, instead of later, at a rate you don't.

When a conversion tends to make sense

• You're in the gap years. Between retirement and when Social Security and required minimum distributions (RMDs) start, taxable income often drops. That's usually the cheapest window to convert.

• Your pre-tax balances are large. RMDs start at 73 or 75, depending on your birth year. Big balances can mean big forced withdrawals that push you into higher brackets later.

• You're married and planning for the survivor. When one spouse dies, the other usually files single, with narrower brackets, on similar income. Converting while you still file jointly can lower the tax bill for the spouse who's left.

• You want to leave money to your children. Under current rules, most adult children have to empty an inherited IRA within 10 years, often during their own peak earning years. Roth dollars reach them tax-free.

• You are UNDER the age 59.5 can pay the tax from savings, not from the IRA itself. If you are under the age of 59.5 AND you convert part of your account to a roth AND you use part of the money in the account to pay the taxes, the portion you used to pay the taxes will be subject to the 10% early withdrawal penalty assessed by the IRS.

  
  

When to slow down

• You'd have to pull from the IRA to pay the tax.

• Your tax rate today is higher than you expect it to be later.

• You're close to Medicare. Medicare premiums (IRMAA) are based on your income from two years earlier, so a conversion at 63 can raise your premiums at 65.

• You're under 59½ and may need the converted dollars within five years. Each conversion has its own five-year clock.

  
  

And one rule to know going in: conversions can't be undone. Once you convert, the tax is owed.

A Roth conversion strategy is a multi-year plan

The real question usually isn't "convert or not." It's how much, and in which years. A good Roth conversion strategy looks at several years at once: when you'll retire, when you'll claim Social Security, when your pension starts, when RMDs begin, and where the Medicare income thresholds sit. Then you convert just enough each year to fill a target bracket without tipping into the next one, or into a higher Medicare premium.

The New York piece

New York doesn't tax Social Security, and it doesn't tax pensions from New York State, local governments, or the federal government. For many Central New York retirees, a pension counts as federal income but not state income, which changes how much room you have to convert. It's one more reason to run the numbers on your actual situation instead of a rule of thumb.

How I help

I build multi-year Roth conversion plans for couples in Central New York who are near retirement or newly retired, coordinated with your pension, Social Security, and Medicare. I'm a fee-only fiduciary, and we meet face to face in Chittenango, by phone, or online.

Want to see whether conversions make sense for you? Schedule a conversation.

This article is for general education and isn't tax or investment advice for your situation. Talk with your tax professional before converting.