How retirement conversions work

Retirement conversions most often mean converting tax‑deferred retirement accounts (traditional IRAs, pre‑tax 401(k)s) into Roth accounts where qualified withdrawals are tax‑free. The converted amount is treated as ordinary income in the year of conversion, so you owe income tax on it at your current marginal rates (see IRS guidance on conversions in Publication 590‑A) (IRS.gov).

In practice, a conversion is a taxable event followed by tax‑free growth: you pay taxes today on the converted dollars so those same dollars can grow and be withdrawn later without federal income tax. Because of that trade‑off, conversions are a timing and planning decision — not a default move for everyone.

Source: Internal Revenue Service, “IRA Publication 590‑A” and the general Roth IRA information at IRS.gov.

Why conversions can reduce future tax burdens

  1. Tax diversification: Having a mix of taxable, tax‑deferred, and tax‑free accounts gives you flexibility to manage taxable income in retirement. By drawing from Roth accounts in high‑income years you can avoid pushing yourself into higher tax brackets or triggering higher Medicare premiums.

  2. Avoiding required minimum distributions (RMDs): Roth IRAs do not require RMDs for the original account owner, which helps control taxable income in later years (see IRS Pub 590‑B). This differs from pre‑tax employer plans and traditional IRAs, which generally require RMDs and therefore force taxable withdrawals.

  3. Estate planning benefits: Roth assets pass to heirs income‑tax free (subject to recent SECURE Act timing rules for distributions to beneficiaries), which can be especially valuable if heirs are in higher tax brackets.

  4. Locking in lower tax rates: If you expect to be in a higher tax bracket later (because of increased retirement income, pension, Social Security, or rising tax rates generally), converting at today’s lower rate can reduce lifetime federal income taxes.

Realistic examples and professional context

In my practice I regularly evaluate clients’ current taxable income, projected retirement income, and other tax triggers (IRMAA for Medicare Part B/D, the net investment income tax) before recommending a conversion. Two common, practical examples:

  • Opportunistic conversion during a low‑income year: A client who changed jobs and had unusually low W‑2 income used the gap year to convert a portion of their traditional IRA to a Roth. The conversion was taxed at a low marginal rate and eliminated future taxable RMDs on that portion.

  • Partial, multi‑year conversion: Spreading conversions over several years keeps each year’s added taxable income within lower tax brackets and avoids large tax bills in a single year. This is how many clients — like the hypothetical Sarah with a $200,000 IRA — achieve tax savings while not triggering higher‑bracket taxation.

When conversions make most sense

Consider conversions when one or more of the following apply:

  • Your current marginal tax rate is lower than your expected rate in retirement.
  • You have room in lower tax brackets that you can use without raising your marginal rate significantly.
  • You want to reduce future RMDs and taxable income in your 70s and 80s.
  • You plan to leave retirement assets to heirs who would benefit from tax‑free distributions.
  • You can pay the conversion tax from outside the retirement account (this preserves more funds inside the Roth to grow tax‑free).

Common pitfalls and interactions to watch

  • Medicare IRMAA and Social Security taxation: Large conversions can temporarily increase adjusted gross income, which may raise Medicare Part B/D premiums (IRMAA) and the taxable portion of Social Security benefits. Model these effects before executing large conversions.

  • Bracket creep: Converting too much in one year can push you into a higher bracket and reduce the tax efficiency of the conversion. Use incremental conversions.

  • No recharacterizations: Since tax law changes that took effect after 2017, you generally cannot recharacterize (undo) a Roth conversion. That means the conversion decision is effectively final, so planning and projections matter (see IRS guidance on conversions and recharacterizations).

  • State taxes: State income tax rules vary. Some states tax conversions differently, and a few may not conform to federal treatment. Confirm state law before converting.

  • Roth 401(k) differences: Roth 401(k)s (employer plans) can be converted to Roth IRAs, but Roth 401(k) accounts are subject to RMDs unless rolled into a Roth IRA. Employer plan rules and timing can affect your decision.

Step‑by‑step checklist to evaluate a conversion

  1. Project your expected retirement income and marginal tax brackets.
  2. Calculate the tax cost of the conversion and how it affects Medicare premiums and Social Security taxation.
  3. Decide how you will pay the conversion tax (outside funds preferred).
  4. Determine the amount to convert this year (consider using remaining space in lower tax brackets).
  5. Consider phasing conversions over multiple years and run alternative scenarios.
  6. Document and report the conversion properly on your tax return (Form 1099‑R and Form 8606 where required; see IRS Pub 590‑A for reporting details).
  7. Revisit the plan annually — tax laws, income, and family circumstances change.

Conversion strategies and advanced considerations

  • Fill the gap strategy: In years with unusually low income (job loss, sabbatical, business loss), convert enough to fill lower tax brackets. This uses otherwise wasted space in low‑rate brackets.

  • Roth ladder for early retirees: Retirees who expect to be income‑free before 59½ may use a conversion ladder by converting and then waiting five years for converted amounts to become qualified or by rolling into a Roth and using qualified distribution rules. This requires careful timing and is often used to access tax‑free funds before retirement age.

  • Estate tax and beneficiary planning: Conversions reduce the size of taxable traditional accounts that force future taxable RMDs on beneficiaries. For families concerned about tax on inherited accounts, Roth conversions can be a powerful tool, though SECURE Act rules limit long‑term stretch strategies for many beneficiaries.

Practical math example (illustrative)

Assume you are in the 22% federal bracket and have $20,000 of headroom before reaching the 24% bracket. Converting $20,000 this year would generate $4,400 of federal tax (22% × $20,000), but that $20,000 then grows tax‑free and can be withdrawn without increasing future taxable income. If converting would push you into the 24% bracket, consider splitting the conversion across years to minimize tax at higher rates. Always model state taxes and Medicare impacts.

Documentation and tax reporting

Conversions generate Form 1099‑R from the distributing account and require Form 8606 to report non‑deductible IRA contributions and conversions on your federal tax return. Keep clear records of conversion dates and amounts; since conversions are not reversible, correct reporting prevents future headaches.

For official rules and current IRS guidance, see:

Related reading on FinHelp

(These internal resources explain tactical steps and examples I use with clients.)

What to discuss with your advisor

In my experience, conversions work best when they are part of a broader financial plan that includes:

  • Social Security claiming strategy
  • Medicare premium planning
  • Legacy / estate tax objectives
  • Current and projected state tax rules

Ask your CFP® or tax advisor to run multi‑year projections and to show the effect of conversions on Medicare IRMAA, Social Security taxation, and long‑term cash flow.

Limitations and final cautions

This article is educational and not personalized tax or investment advice. Conversions change your tax situation immediately and permanently — mistakes or rushed decisions can be costly. Tax laws evolve; confirm the latest federal and state rules before acting.

Professional sources used: IRS Publication 590‑A and 590‑B and the IRS Roth IRA pages (IRS.gov). For consumer‑facing context on retirement planning trade‑offs, see ConsumerFinancialProtection Bureau resources and FinHelp’s related guides.

If you’d like a worksheet to model conversions over multiple years, I can outline a simple scenario template you or your advisor can use to run numbers.