If you are in a lower tax year than usual, a Roth conversion can be a smart way to move money from a traditional IRA into a Roth IRA and lock in today’s tax rate. Think of it as paying tax on your terms now so that future withdrawals can be tax free if you follow the rules.
A simple way to decide
Ask yourself three quick questions.
- Is my tax rate this year likely lower than what I expect later in retirement
- Do I have cash on hand to pay the tax without taking it from the IRA
- Will the added income keep me below important thresholds such as Medicare surcharges or marketplace health credits
If you can answer yes to most of these, a partial conversion before December 31 is worth a closer look.
When a conversion often helps
Early retirement years before Social Security and before required minimum distributions can be a sweet spot. Converting a slice each year can shrink future required distributions, smooth taxes over time, and give you more control over retirement income since qualified Roth withdrawals are generally tax free.
When to wait or skip
If converting would push you into a higher bracket than you expect later, reduce premium tax credits for marketplace coverage, or increase Medicare Part B and Part D through the two year lookback, pause and run the numbers. If the only way to pay the tax is to withhold it from the conversion, that weakens the benefit.
How much to convert this year
Start with your current taxable income, then see how much room remains in your target bracket. Decide an amount that fills that space without tripping unwanted side effects. Convert cash or shares in kind from your traditional IRA to your Roth IRA and set aside cash for the tax. Keep the confirmation and plan to file Form 8606 with your return.
The rules in plain English
- A conversion must be completed by December 31 to count for this year.
- You cannot convert a required minimum distribution and you must take any RMD first.
- There are no do overs since recharacterization of conversions is no longer allowed.
- Each conversion has a five year clock for penalty purposes if you are under age 59 and a half.
- If your IRA has both pre tax and after tax dollars, the pro rata rule applies unless you isolate basis.
- Conversions can affect Medicare IRMAA, the taxation of Social Security benefits, the net investment income tax, and state taxes.
Bottom line
A well-timed Roth conversion can cut lifetime taxes and create more flexibility later. Focus on filling today’s bracket, avoiding avoidable surcharges, and paying the tax from cash. If the math points in your favor, act before December 31.
At Custom Fit Financial, we specialize in advice only fee only retirement planning for individuals and couples age 55 and over. We offer hourly and project based financial planning with no sales pressure or product commissions. Whether you’re in Cedar Rapids, Iowa City, or working with us virtually across the United States, we help you make confident informed decisions about your retirement.
Looking for guidance on whether a Roth conversion makes sense for you? Schedule your free intro call today.
