By Michael E. DeMassa, CFA, CFP®, AEP®
The question isn’t whether Roth conversions are “good” or “bad.” The real question is: When do they make sense?
Recent tax law changes (particularly the SECURE Act) have shifted how we evaluate IRA planning. What used to be a “defer as long as possible” strategy now requires a more nuanced, forward-looking approach.
Let’s walk through why.
What Is a Roth Conversion?
A Roth conversion moves money from a Traditional IRA to a Roth IRA. You pay income tax today on the amount converted. In exchange, the funds grow tax-deferred and can be withdrawn tax-free in the future (subject to rules).
At first glance, this seems like simply choosing to pay tax now instead of later. And mathematically, if tax rates remain constant, the outcome is the same (see Table 1).
But in real life, tax rates are rarely constant. That’s where strategy matters.
Why the SECURE Act Changed Roth Conversion Planning
Before the SECURE Act, many beneficiaries could use the “stretch IRA,” withdrawing small required minimum distributions (RMDs) over their lifetime.
For example, a 50-year-old non-spouse beneficiary once had 36 years to distribute inherited IRA assets which calculated to be less than 3% required to come out in year one.
That changed in 2020.
Today, most non-spouse beneficiaries must fully distribute inherited IRAs within 10 years. No lifetime stretch is permitted. This compressed timeline can push inherited IRA distributions into beneficiaries’ peak earning years, potentionally resulting in significantly higher tax rates.
For families focused on legacy planning, this change alone has made Roth conversion analysis more compelling.
When Roth Conversions Make the Most Sense
Roth conversions are not an all-or-nothing decision. They are often most effective when executed strategically over time.
Low-Income Years Before RMDs
The years between retirement and starting Social Security, or before Required Minimum Distributions begin (currently age 73) can create valuable planning windows.
Filling up lower tax brackets during these years can reduce future RMD pressure.
Managing Future Required Minimum Distributions
Large pre-tax IRA balances can create large RMDs later in life. Those RMDs can:
- Push you into higher tax brackets
- Increase taxation of Social Security
- Trigger Medicare premium surcharges
Proactively converting portions of IRA assets may help smooth lifetime taxable income.
Planning for the Widow’s Tax Penalty
Married couples filing jointly benefit from wider tax brackets. After the first spouse passes away, the surviving spouse files as single which may lead to significantly higher tax rates on the same income.
Strategic Roth conversions while both spouses are alive can help reduce this future compression.
State Tax Changes and Relocation
A future move to a no-income-tax state, or away from one, can materially impact whether converting today makes sense. Tax geography matters.
Legacy Planning for Children in High Tax Brackets
If adult children are in peak earning years, inheriting a Traditional IRA under the 10-year rule may force distributions at high marginal rates. Converting at a lower parental tax rate can sometimes reduce total family tax liability across generations.
Hidden Tax Traps of Roth Conversions
Roth conversion income doesn’t exist in isolation. Adding conversion income can:
- Increase taxation of Social Security benefits
- Push qualified dividends and long-term capital gains out of the 0% bracket
- Trigger Medicare IRMAA surcharges
- Phase out deductions or credits
For example, a conversion that appears to be taxed at 12% may effectively cost much more once stacking effects are considered.
This is why modeling matters. We use tax projection software and coordinate with clients’ CPAs before implementation. We also prefer waiting until late in the calendar year, when income visibility is clearer.
Measure twice. Convert once.
In Conclusion: Minimize Lifetime Tax on IRA Assets
The objective of Roth conversion planning is not to avoid taxes altogether. It is to minimize the lifetime tax rate on retirement assets and potentially across generations. That requires:
- Forecasting future income
- Understanding bracket changes
- Accounting for legislative risk
- Coordinating tax and estate planning
Each situation is unique. The math may be simple but the variables are not.
Roth Conversion FAQs
Do Roth conversions always save taxes?
No. If your tax rate today is the same as in the future, the net result can be equivalent. Roth conversions add value when you convert at a lower rate than you (or your heirs) would otherwise pay later.
Which tax bracket is best for a Roth conversion?
There is no universal “best” bracket. Many strategies involve filling up lower marginal brackets in years of temporarily reduced income. The key is comparing today’s marginal rate with projected future rates.
How does the SECURE Act impact inherited IRAs?
Most non-spouse beneficiaries must now fully distribute inherited IRAs within 10 years. This often accelerates taxation and can increase the appeal of lifetime Roth conversions for legacy planning.
Should I convert my entire IRA at once?
Rarely. Most effective strategies involve partial conversions spread over multiple years to manage tax brackets and avoid unintended stacking effects.
Each client’s situation is different. This material is intended as a general overview of factors involved in Roth conversions. Please consult your tax professional and estate planning attorney for specific advice.