Beyond 'convert in a low year': how to build a multi-year Roth conversion plan.

Most Roth conversion advice stops at "convert in a low-income year." That is a good start, but the real question is how much to convert, in which years, and what it does to everything else on your tax return. Here is how we think about building a multi-year conversion plan.

The basic trade

Converting traditional IRA or 401(k) money to a Roth means paying ordinary income tax on the converted amount now. In return, future growth and qualified withdrawals are tax-free, Roth IRAs have no required minimum distributions for the original owner, and heirs generally inherit the account income-tax-free, though most non-spouse heirs must empty it within ten years.

The conversion makes sense when the rate you pay today is lower than the rate you, or your heirs, would otherwise pay later. That comparison is rarely obvious, which is why it is worth modeling.

Filling brackets, year by year

The most common approach is to convert just enough each year to fill a chosen tax bracket. The window between retirement and the start of required minimum distributions, currently age 73 or 75 depending on your birth year, often has the lowest taxable income of your adult life. A large pre-tax balance left untouched can produce RMDs later that push you into higher brackets than you were in while working.

What else a conversion touches

• Medicare premiums. IRMAA surcharges are based on income from two years earlier, so a conversion at 63 can raise premiums at 65.
• Social Security taxation. Added income can make more of your benefit taxable.
• The 3.8% net investment income tax. Conversion income is not itself subject to it, but it can push other investment income over the threshold.
• State taxes. A planned move from a high-tax state to a no-tax state can change the math entirely.
• Health insurance subsidies. Early retirees buying marketplace coverage can lose credits.

Pay the tax from outside the IRA

Using taxable savings to pay the conversion tax effectively moves more money into the Roth. Withholding the tax from the conversion itself shrinks the benefit, and before age 59½ the withheld amount can also be subject to a 10% penalty.

Timing within the year

Conversions cannot be undone since 2018, so many families wait until late in the year when income is clearer, or convert in tranches. A market decline can also be an opportunity: converting shares when prices are lower means paying tax on a smaller value, with the recovery happening inside the Roth.

Questions to ask

• What will my RMDs look like at 75 if I do nothing?
• Which bracket am I filling, and what does each additional dollar cost in total, including IRMAA?
• Do I have cash outside the IRA to pay the tax?
• Who inherits this account, and what bracket are they in?

For a deeper look at how we approach this, see Roth conversion planning.