Should You Do Roth Conversions Before RMDs Start?
A retired couple with a large traditional IRA may have years of relatively low taxable income between retirement and age 73. Then required minimum distributions (RMDs) begin, Social Security is already taxable, and the tax picture can change quickly. That is why the answer to the question, “should you do Roth conversions before your required minimum distributions (RMDs) start?”, is so important.
Short answer
While for many retirees the short answer is yes, at least partially – the right decision process should include a multi-year tax projection, not a guess about next April’s return. Estimate income from wages, pensions, Social Security, dividends, capital gains, and planned portfolio withdrawals. Then model RMDs, expected tax brackets, Medicare premiums, charitable goals, and the tax situation of likely heirs.
This is also a planning decision, not just a tax decision. Your investment strategy, cash reserves, spending needs, and market risk all affect how much flexibility you have. A fiduciary financial advisor should explain the trade-offs clearly, disclose how they are compensated, and make recommendations based on your interests rather than product commissions.
What is a Roth conversion?
A Roth conversion moves money from a traditional IRA or 401(k) into a Roth IRA. You pay ordinary income tax on the amount converted in that year. After that, qualified withdrawals from the Roth are tax-free, and Roth IRAs have no RMDs for the original owner.
Why is the window before RMDs so important?
RMDs currently begin at age 73, or 75 for people born in 1960 or later. Once they start, you must withdraw a minimum amount each year, whether you need it or not. Large traditional IRAs can push retirees into higher tax brackets in their 70s and 80s.
If you retire at 62 or 65 and delay Social Security, your taxable income may be unusually low for several years. That’s often the cheapest time to pay tax on a conversion.
The tax bill is real, and it deserves respect
A Roth conversion is taxable income in the year it occurs. Converting too much in one year can move you into a higher marginal tax bracket and undermine the benefit you hoped to gain.
For example, a retiree living on pension income, Social Security, and portfolio withdrawals may have room to convert $40,000 without crossing into the next tax bracket. Converting $150,000 simply because the account is available could produce a much larger tax cost. The better approach may be a series of annual conversions, reviewed alongside projected income, deductions, and cash needs.
Ideally, taxes on the conversion are paid from cash outside the IRA. Using IRA funds to pay the tax reduces the amount that reaches the Roth account. If you are under age 59½, the amount withheld for taxes may also be subject to an early-withdrawal penalty.
Watch Medicare premium thresholds
Medicare income-related monthly adjustment amounts, commonly called IRMAA, are another factor. A substantial Roth conversion can raise Medicare premiums, generally based on income reported two years earlier. This does not necessarily make a conversion a poor decision, but it is a cost that should be included in the calculation.
A sound financial plan compares the current tax cost, potential Medicare surcharge, and projected future tax savings. The goal is not to avoid every tax increase this year. It is to avoid paying unnecessarily high taxes over your lifetime.
When converting before RMDs may NOT make sense
Roth conversions are less compelling when you expect to be in a materially lower tax bracket later, need the converted funds soon, or cannot comfortably pay the tax from non-retirement assets. They may also be less useful if charitable giving is central to your plan.
After age 70½, a qualified charitable distribution can send money directly from a traditional IRA to an eligible charity. It can count toward an RMD while keeping that distribution out of adjusted gross income, subject to applicable rules and limits. For charitably inclined retirees, preserving some traditional IRA assets can be advantageous.
Estate goals also matter. Adult children who may inherit an IRA often must withdraw inherited assets within 10 years, potentially during their highest earning years. Roth assets can be especially valuable to heirs because qualified withdrawals are generally tax-free. Still, inheritance planning should not be the only reason to accept an unfavorable conversion tax bill today.
Why hasn’t my advisor brought this up?
Roth conversions take tax planning, not just investment management. Some advisors don’t coordinate with your tax return. Others avoid the topic because converting means paying tax now, which can be an uncomfortable conversation.
What are the trade-offs?
• You pay tax now. Ideally, you pay it from non-retirement savings so the full amount keeps growing in the Roth. • Medicare premiums. Conversion income can raise Medicare Part B and Part D premiums through IRMAA, usually two years later. • Social Security taxation. Extra income can make more of your Social Security benefit taxable. • The five-year rule. Each conversion has its own five-year clock for penalty-free withdrawal of converted amounts if you’re under 59½. • Future tax rates are unknown. Conversions pay off most if your tax rate later is equal to or higher than today.
How do I decide how much to convert?
- Project your income and tax bracket for each year until RMDs begin.
- Estimate the size of your future RMDs if you do nothing.
- Convert enough each year to “fill up” a lower bracket without crossing into the next one or a higher IRMAA tier.
- Pay the tax from taxable savings if you can.
- Revisit the plan every year, ideally before December, using your actual income.
Why it matters for your heirs
Under current law, most non-spouse beneficiaries must empty an inherited IRA within 10 years. If your children inherit a traditional IRA during their peak earning years, they may pay tax at high rates. Inherited Roth IRAs also follow the 10-year rule, but withdrawals are generally tax-free.
How Studdard Financial helps
As a fiduciary fee-only registered investment advisor, we coordinate Roth conversion planning with Social Security timing withdrawals and Medicare premiums so they work together instead of against each other.
FAQ
Can I undo a Roth conversion? No. Recharacterizations of conversions were eliminated, so plan carefully before converting.
Is it too late to convert after RMDs start? No, but you must take your RMD for the year first. RMDs themselves can’t be converted.
Should I convert everything at once? Usually not. Spreading conversions over several years often keeps you in lower brackets.
Get a conversion plan
If you’re between retirement and RMDs and no one has run the numbers on Roth conversions, let’s talk.
About Byron L. Studdard, CFP®
Byron L. Studdard is a CERTIFIED FINANCIAL PLANNER® professional and the founder of Studdard Financial – a fee-only fiduciary registered investment adviser serving clients from coast to coast from offices in Sarasota, FL and Germantown (Memphis), TN. For more than thirty years, he has provided personalized investment advice, retirement planning guidance, social security maximization strategies, and intergenerational wealth-transfer support to clients seeking disciplined, trustworthy financial oversight. His writing has been featured on the websites of ABC News, Good Morning America, and Yahoo. He can be reached at Byron@StuddardFinancial.com.
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