When Is the Best Time to Do a Roth Conversion?

Roth Conversions Before Retirement: Why the Years Before RMDs Matter Most

Most people first hear about Roth conversions in their sixties, usually from a friend who just did one or a headline about tax-free retirement income. By then, some of the most useful planning years have already passed.

The stretch between the end of peak earnings and the start of required minimum distributions is, for many households, the lowest-tax period of an entire adult life. What happens in that window can shape decades of retirement income.

What a Roth conversion is

A Roth conversion moves money from a pre-tax retirement account, such as a traditional IRA, a rollover IRA, or in some cases a former employer's 401(k), into a Roth IRA. The converted amount is added to your taxable income for that year and taxed as ordinary income.* In exchange, that money and its future growth may be withdrawn tax-free in retirement if the applicable requirements are met.

The mechanics are simple. The decision is not. You are choosing to pay a known tax bill today rather than an unknown one later, and whether that trade favors you depends on your bracket now, your expected bracket later, where the tax money comes from, and how long the dollars have to grow.

There is no income limit on conversions and no annual dollar cap.* High earners who cannot contribute to a Roth IRA directly may still convert, which is one reason the strategy comes up so often for professionals and business owners.

Why the pre-retirement years matter most

Income can climb through the forties and fifties, peak, then drop at retirement. Later, required minimum distributions begin, and taxable income climbs again, this time not by choice.

Between the drop and the RMDs sits a valley. Under current law, the RMD age is 73 for individuals who reach age 72 after December 31, 2022 and age 73 before January 1, 2033, rising to 75 for those who reach age 74 after December 31, 2032.* For someone who retires at 62 and begins RMDs at 73, that valley can last eleven years. Income may be low. Tax brackets may leave real room before the next threshold. Those are the years when converting tends to cost the least.

The mistake is waiting until the valley arrives to start thinking about it. By then several decisions are already locked in: when Social Security was claimed, how much sits in taxable versus tax-deferred accounts, and whether cash is available to pay conversion taxes. Each either widens or narrows the opportunity.

The case for converting earlier

When growth happens in the Roth, not the traditional IRA. Convert at 58, and the money may have fifteen or more years to compound before you would likely touch it, and qualified withdrawals of that growth come out tax-free. Convert at 72 and the same dollars have far less runway.

Future RMDs get smaller. Every dollar moved out of a traditional IRA is a dollar not counted in a future required distribution. Households with substantial pre-tax balances sometimes find RMDs pushing them into a higher bracket than they occupied while working. Converting earlier reduces the base those required distributions are calculated from.

Roth IRAs have no lifetime RMDs. Traditional IRAs require withdrawals once you reach the applicable age. Roth IRAs do not require distributions during the original owner's lifetime, so the money can stay invested.*

Bracket management becomes possible. Conversions are not all-or-nothing. Many households convert partial amounts each year, using the room left in their current bracket without crossing into the next. Spread over several years, this can move a meaningful balance at a more controlled cost.

Heirs may face a different tax picture. Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA from someone who died after December 31, 2019 must empty the account within 10 years.* If the account is traditional, those withdrawals are generally taxable to the heir, often during their own peak earning years. An inherited Roth IRA is subject to the same 10-year distribution requirement, but qualified withdrawals are generally tax-free.*

The costs and constraints

Conversions are not free, and they are not right for everyone.

The tax bill is immediate. You owe ordinary income tax on the converted amount in the year you convert. Paying that tax from funds outside the retirement account is generally what makes the math work, since paying from the IRA itself reduces the amount that ends up growing tax-free.

Bracket creep is real. A conversion large enough to push you into a higher bracket can cost more than it saves. The same increase in income can also affect other calculations, including the taxability of Social Security benefits and Medicare income-related monthly adjustment amounts, which are based on modified adjusted gross income from two years prior.*

Conversions cannot be undone. Effective January 1, 2018, under the Tax Cuts and Jobs Act, a conversion from a traditional, SEP, or SIMPLE IRA to a Roth IRA cannot be recharacterized.* If markets decline after you convert, you cannot reverse the transaction. This makes sizing and timing more consequential than they were before 2018.

Two separate five-year rules apply. The first governs tax-free treatment of earnings and generally requires that you have held a Roth IRA for five years and meet another condition, such as reaching age 59 1/2.* The second applies to each conversion separately and can trigger a 10% additional tax on converted amounts withdrawn within five years, but generally matters only if you are under 59 1/2 at the time of withdrawal.* For most people converting in their sixties, the earnings rule is the binding constraint, not the per-conversion clock.

State taxes matter. Kentucky and Ohio treat retirement income differently, and Kentucky's rules include a retirement income exclusion with specific qualifying conditions. Converting while living in one state and retiring to another changes the calculation. A local tax professional can confirm how current rules apply to you.

When conversions often deserve a look

• A low-income or gap year, such as a job change, sabbatical, business loss, or early retirement before Social Security begins
• Large traditional IRA or 401(k) balances relative to taxable and Roth accounts
• An expectation of higher tax rates later, whether from personal circumstances or future legislative change
• Cash available outside retirement accounts to cover the tax
• A market decline, when converting the same shares produces a smaller taxable amount
• Charitable giving in the same year, where deductions may offset conversion income
• Estate planning goals where leaving tax-free assets to heirs is a priority

When they often do not

• Your current bracket is already at or above your expected retirement bracket
• The only available source for the tax payment is the retirement account itself
• The money will be needed within five years
• You are approaching a Medicare income threshold or another income-based limit
• Most of your estate is designated for charity, which can generally receive traditional IRA assets without the tax burden an individual heir would face

How the planning works

A conversion strategy is rarely a single decision. It is usually a multi-year projection.

The work involves modeling taxable income across the years ahead, finding where room exists in each bracket, and sizing annual conversions to use that room without exceeding it. It accounts for Social Security timing, since claiming early adds taxable income that reduces conversion capacity, and for Medicare enrollment, given the two-year lookback on income-related premium adjustments. It gets revisited annually, because income, markets, and tax law all move.

Note also that the conversion deadline is December 31 of each year, not the tax filing deadline, so planning ahead avoids compressed year-end decisions.

None of this requires waiting until retirement to begin. The strategy often works better when the groundwork is laid years in advance: building taxable savings to fund future conversion taxes, coordinating retirement dates, and sequencing income sources deliberately. If you are weighing a 401(k) rollover or reviewing your IRA strategy, those decisions interact directly with conversion planning.

Talking it through

If you are within ten to fifteen years of retirement and hold significant pre-tax retirement assets, a conversion analysis is worth a conversation. The question is not whether Roth conversions are good or bad in the abstract, but whether the numbers in your situation, this year and in the years ahead, make converting a reasonable use of the room available in your bracket.

To discuss whether a Roth conversion analysis makes sense for you, call Mueller Financial, Inc. at (859) 918-6750 or reach out through our contact page.