At any stage of your retirement plan, Roth conversions can be a powerful tool to manage your tax strategy. Converting is not for everyone, but when used intentionally, it can create more control over future withdrawals and help reduce the tax sensitivity of your retirement income.
Why a Roth conversion can help
Traditional IRA and other pre‑tax retirement dollars are taxed as ordinary income when withdrawn. The more you withdraw in a single year, the higher your taxable income may be, which can affect tax brackets and Medicare premiums.
A Roth conversion moves funds from a traditional IRA into a Roth IRA and pays the tax now. Once in the Roth IRA, future qualified withdrawals are tax‑free, which can provide flexibility later and reduce the risk of paying higher tax rates on required withdrawals.
When conversions tend to be most attractive
- Low‑income years: Early retirement years before RMDs begin are often a good opportunity to fill lower brackets with conversion dollars.
- Market pullbacks: Some clients convert during a market downturn so that future growth occurs in the Roth. This is also a good opportunity to discuss your investment horizon and risk tolerance for the Roth funds.
- Before claiming Social Security or pension benefits: This can allow more room to convert without pushing income into higher brackets.
- To manage lifetime RMDs: Because Roth IRAs do not have lifetime RMDs for the original owner, moving part of a pre‑tax balance to Roth can reduce future required withdrawals.
How much to convert
Rather than attempting an all‑or‑nothing conversion, many clients convert in annual tranches. The goal is to convert up to the top of a target tax bracket, while avoiding bracket creep or unintended effects on credits and deductions. This helps strike the right balance between a manageable current tax bill and lower taxable income later.
Key rules and sequencing
- RMD sequencing: In any year that an IRA RMD is due, you must take the full RMD first. Only then can you convert additional IRA dollars. This is an important operational step.
- Five‑year clock considerations: Each conversion has its own 5‑year clock for penalty‑free access to converted principal if you are under 59½. Earnings require meeting the Roth five‑year rule for qualified distributions and age 59½ before they are tax‑free.
- Roth conversions and employer plans: Some employer plans allow for a Roth conversion within the plan. If not, a rollover to an IRA followed by a conversion may be considered.
- State taxes: State tax rules vary. We will consider both federal and state effects.
Situations where a conversion may not fit
- Lower expected tax rates later: If you anticipate being in a lower bracket in retirement, paying tax today may not be efficient.
- Short time horizon: If you need the funds soon, there may be insufficient time for the tax‑free growth to outweigh the upfront tax cost. Also consider early withdrawal penalties.
- IRMAA considerations: Large conversions can increase Medicare premiums two years later. We can look at IRMAA brackets and smooth conversions across years to avoid jumps.
The deadline to complete a Roth conversion for your 2026 tax return is December 31. Since investment companies can experience end-of-year delays, we recommend reaching out to your investment professional to discuss a Roth conversion by December 1.
Contact Us
If you would like to discuss whether a Roth conversion fits your retirement plan, we are here to help.
Contact Fiona Morina, Administrative Assistant for Jane M. LaLonde, CFP®, at 612.431.7509 or Fiona@LWAG.com.
Our address: 2701 University Ave SE, Minneapolis, MN 55414
This information is not intended as tax or legal advice. Please consult your tax advisor regarding your specific situation. Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.