Should You Convert Your Traditional IRA to a Roth?

A guide for clients between pre-retirement and 73 years old

A client briefing from Records In Order — Tax & Accounting

If you are in your fifties or sixties, you may be sitting in the single best window of your life for a Roth conversion — and it is a window that closes. Here is what a conversio

n does, why timing matters so much at this stage, and what it means for the people who will inherit your accounts.

What a conversion actually is

You move money from a traditional IRA (never taxed) into a Roth IRA. You pay ordinary income tax on the amount you move, in the year you move it. From that point forward, that money grows tax-free, comes out tax-free in retirement, and — importantly — is never subject to required minimum distributions.

You are not avoiding tax. You are choosing when to pay it. The entire question is whether your tax rate today is lower than the rate you (or your heirs) would pay later.

A simple example

Margaret is 62, recently retired, and will not start Social Security until 70. Her only income right now is about $30,000 from a small pension. She has $600,000 in a traditional IRA.

Because her income is low, Margaret has room in the 12% and 22% brackets that she will never have again once Social Security and RMDs begin. She converts $70,000 this year, paying roughly $12,000 in federal tax — call it a 17% effective rate on the converted amount.

If she had left that money alone, it would have kept growing until RMDs began at 73, stacking on top of Social Security and pension income — likely taxed at 22% to 24%, possibly more if rates rise. On $70,000, that is a difference of several thousand dollars, and Margaret repeats the maneuver each year until 70.

The larger effect is what she has done to her future: every dollar converted is a dollar that will never generate an RMD, never push her Social Security further into taxability, and never raise her Medicare premiums.

Why the years between retirement and age 73 are the sweet spot

Most people's income follows a U-shape: high during working years, low for a few years after retiring, then high again once Social Security and RMDs kick in. That low valley — often ages 60 to 72 — is when conversions are cheapest.

Three rules of thumb:

• Convert in low-income years. Early retirement, a sabbatical, a bad business year, or the year you sell a rental at a loss.

• Fill up a bracket, then stop. Convert exactly enough to reach the top of your current bracket without spilling into the next. This is the discipline that makes conversions work.

• Do it repeatedly, not all at once. A series of moderate annual conversions almost always beats one large one, which can push you into higher brackets and trigger the surcharges below.

Two traps specific to your age group

IRMAA — the Medicare premium surcharge. Once you are 63 or older, conversion income affects your Medicare Part B and D premiums two years later. Cross an IRMAA threshold by even one dollar and your premiums jump for the entire year. Conversions near these thresholds need to be calculated to the dollar, not estimated.

Social Security taxation. If you have already claimed benefits, conversion income can push more of your Social Security into taxable territory, creating an effective marginal rate well above your stated bracket. This is the strongest argument for converting before you claim.

Also worth knowing: the five-year rule. Each conversion has its own five-year clock before the converted principal can be withdrawn penalty-free. After 59½ this is rarely a practical problem, but it does mean conversions are not a short-term parking spot.

The effect on your heirs — often the biggest reason to convert

This is where conversions have changed dramatically. Under current law, most non-spouse beneficiaries — your adult children — must empty an inherited IRA within 10 years.

Picture a daughter who is 50, in her peak earning years, in the 32% bracket. She inherits a traditional IRA and must withdraw all of it within a decade, on top of her own salary, at her rates. A meaningful share goes to tax.

Inherit a Roth instead and the 10-year rule still applies — but every dollar comes out tax-free, and it grows tax-free for those ten years. When you convert, you are paying the tax at your rate to spare your children paying it at theirs. For families where the children out-earn the parents, this is frequently the single most valuable estate move available.

One planning note: Roth IRAs are also the cleanest asset to leave to children while leaving traditional IRA money to charity — a charity pays no tax on either, so the pre-tax dollars are better spent there.

Other things that matter

• Pay the tax from outside the IRA. Using non-retirement cash to pay the conversion tax is what makes the math work. Withholding from the conversion itself shrinks the amount that gets to grow tax-free.

• Conversions cannot be undone. Recharacterization of conversions was eliminated in 2018. Once done, it is done — which is why we model before we move.

• The pro-rata rule. If you have any non-deductible basis in any traditional IRA, every conversion is partly taxable and partly not, calculated across all your IRAs combined. This surprises people who assume they can convert only the after-tax portion.

• California. California taxes conversions as ordinary income and offers no special treatment. If a move to a no-income-tax state is in your plans, that timing matters enormously.

• Roth 401(k) money. If you are still working and your plan offers it, in-plan Roth contributions accomplish something similar going forward.

When a conversion is probably not right

Skip it, or go slowly, if you are in your peak earning years right now and expect materially lower income later; if you would have to raid the IRA itself to pay the tax; if you intend to leave the IRA to charity; or if you are within two years of a Medicare IRMAA threshold you cannot afford to cross.

The bottom line

For most clients in their late fifties and sixties, the answer is not "convert everything" or "convert nothing." It is a multi-year plan: convert a calculated amount each year through the low-income window, stop at the bracket or IRMAA line, and keep going until RMDs begin.

That plan needs to be run against your actual numbers — your other income, your Medicare year, your children's tax brackets, and your state. Contact us online, or call our office - we can model it before year-end, the deadline for conversions to count for the current tax year.

This article is general information, not tax advice for your particular circumstances. Tax rules, brackets, and thresholds change; verify current figures with our office before acting.

Scott C Turner CPA   RecordsInOrder.com

Records In Order · Tax & Accounting Services