Roth Conversion Strategies

What Is a Roth Conversion?

A Roth conversion is the process of moving money from a Traditional IRA or an old employer-sponsored plan such as a 401(k) into a Roth IRA. When you convert, you pay ordinary income tax on the amount transferred in the year the conversion occurs. In exchange, the funds then grow completely tax-free inside the Roth IRA, and qualified withdrawals in retirement are also tax-free.

Think of it as a strategic trade: you accept a known tax cost today to eliminate an unknown, potentially larger tax cost in the future. For many retirees and pre-retirees, this trade-off can be enormously beneficial, particularly when you consider that tax rates may rise, your income may increase, or Required Minimum Distributions could push you into a higher bracket later.

The mechanics are straightforward. Your Traditional IRA custodian transfers the specified amount to your Roth IRA. You report the converted amount as ordinary income on your tax return for that year. From that point forward, the converted funds grow tax-free, and after meeting certain holding requirements, all withdrawals are tax-free as well.

Importantly, there is no income limit for Roth conversions. Even if your income is too high to contribute directly to a Roth IRA, you can convert any amount from a Traditional IRA. There is also no limit on how much you can convert in a single year, though, as we will discuss, converting strategically over multiple years usually produces a better outcome than converting everything at once.

2025 Federal Income Tax Brackets

Understanding your current marginal tax bracket is the foundation of any Roth conversion decision. The goal is to convert enough to take advantage of lower brackets without unnecessarily pushing income into a much higher one. Here are the 2025 federal income tax brackets:

The Bracket-Filling Strategy

One of the most effective approaches to Roth conversions is called "bracket filling." The idea is simple: convert just enough each year to fill up the remaining room in your current tax bracket, or at most, the next bracket you are comfortable paying taxes in, without spilling significant income into a substantially higher rate.

For example, suppose you are a married couple filing jointly with $120,000 in taxable income from Social Security and a pension. That puts you solidly in the 22% bracket, which tops out at $206,700 for joint filers. You have roughly $86,700 of room left in the 22% bracket. Converting that amount would cost about $19,074 in additional federal tax (22% of $86,700), but every dollar converted now avoids being taxed at what could be a higher rate during Required Minimum Distributions.

This approach requires knowing your projected income for the year. You will also want to account for any additional income from capital gains distributions, Social Security taxation thresholds, and state income taxes. The key is precision: convert enough to be strategic, but not so much that you trigger unintended consequences in other parts of your financial picture.

Conversion Scenario Comparison

To illustrate the long-term impact of different strategies, consider a 60-year-old retiree with $500,000 in a Traditional IRA, projecting a 7% annual growth rate. We assume a current 22% marginal tax rate during conversions and a projected 24% marginal rate when RMDs begin.

In this illustration, Scenario B produces the greatest lifetime tax savings because conversions stay within the 22% bracket, while Scenario C pushes into the 24% bracket and involves more tax paid up front. Both outperform doing nothing, because the tax rate at RMD time is projected to be 24% or higher. The numbers also demonstrate why working with an advisor to model your specific situation is so valuable: the optimal strategy depends on your actual income, bracket, and time horizon.

When Roth Conversions Make the Most Sense

Certain life situations create an ideal window for Roth conversions. Recognizing these moments can save you tens of thousands of dollars over your lifetime.

Low-income years. If you experience a year with lower-than-normal income, perhaps due to a job change, a sabbatical, or a business downturn, your marginal tax rate drops, and conversions become cheaper.

Early retirement gap years. The period between leaving work and starting Social Security or pension income is often the most powerful conversion window. During these years, your taxable income may drop significantly, allowing large conversions at low rates.

Before RMDs begin at age 73. Once Required Minimum Distributions start, they add to your taxable income every year, potentially pushing you into higher brackets. Converting before RMDs begin reduces the balance subject to mandatory distributions.

During market downturns. When markets decline, the value of your Traditional IRA drops, which means you can convert more shares for less taxable income. When the market recovers, that recovery happens inside your Roth IRA, completely tax-free.

When tax rates are expected to rise. If you believe federal tax rates may increase in the future, whether due to legislative changes or the sunset of current tax provisions, paying tax now at today's known rate can be preferable to paying an uncertain, potentially higher rate later.

Important Watch-Outs

Building a Multi-Year Conversion Plan

The most successful Roth conversion strategies are not single-year events. They are carefully planned, multi-year campaigns designed to systematically move assets from tax-deferred to tax-free status while minimizing the overall tax cost.

A well-constructed Roth conversion ladder might span five, seven, or even ten years. Each year, you convert an amount calibrated to your projected income, tax bracket, Medicare IRMAA thresholds, and other relevant factors. As you convert, your Traditional IRA balance shrinks, reducing future RMDs and giving you greater control over your taxable income in retirement.

This type of planning requires projecting your income and tax picture several years into the future and updating the plan annually as circumstances change. Tax law changes, market performance, health events, and family situations can all shift the optimal conversion amount from year to year.

Working with a financial advisor who understands the interplay between Roth conversions, Social Security timing, Medicare costs, and investment management is essential. The advisor can model different scenarios, stress-test assumptions, and help you execute conversions at the right time and in the right amounts throughout the year.

The bottom line is this: a Roth conversion is not just a tax maneuver. It is a long-term wealth strategy that, when executed thoughtfully, can provide decades of tax-free income, reduce the tax burden on your heirs, and give you significantly more flexibility in how you fund your retirement.

This article is for informational purposes only and does not constitute investment advice. All information should be discussed with a qualified financial advisor before implementation.