How IRA conversions work and the timing levers you control

Converting a traditional IRA to a Roth IRA means you move pre-tax retirement savings (or after-tax nondeductible basis) into an account where future qualified withdrawals are tax-free. The converted amount is generally treated as ordinary income in the year of conversion and must be reported on your tax return (see IRS guidance on IRAs and Roth conversions: https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras). You usually file Form 8606 to report the taxable portion of a conversion (IRS Form 8606 instructions).

Timing is the single biggest controllable variable: when you convert affects the taxable amount (market value at conversion), which tax bracket you trigger, and other means-tested thresholds (e.g., Medicare IRMAA, taxability of Social Security, and eligibility for certain credits). In practice I tell clients that the question is rarely “should I convert?” but rather “when and how much should I convert?”.

Key timing levers

  • Convert in low-income years: If you have a year with lower wages, a job gap, or large deductions (charitable gifts, business losses), taxable conversions can be absorbed in lower tax brackets.
  • Convert after market drops: Converting after a market decline means paying tax on a smaller balance, then capturing recovery inside the Roth for tax-free growth.
  • Stagger conversions: Spreading conversions over multiple years avoids pushing a conversion into a higher marginal bracket.
  • Coordinate with RMD rules: RMDs from traditional IRAs begin at age 73 (as of 2025 under SECURE 2.0) and can force taxable income; converting before RMDs start eliminates future RMDs on amounts converted.

Tax mechanics and reporting to remember

  • Converted amounts are taxed as ordinary income for the year of conversion. That can increase marginal rates and phaseouts.
  • You report conversions on Form 8606; failing to file 8606 can create problems or penalties.
  • If you made nondeductible contributions in prior years, conversions require careful pro‑rata calculations (IRS Pub 590-A explains basis and pro‑rata rules).
  • Each conversion has its own five-year rule for determining whether distributions of converted amounts are subject to the 10% early withdrawal penalty if taken before age 59½. The Roth qualified-distribution five‑year rule (for tax-free earnings) runs from the year of your first Roth contribution or conversion.

Common financial impacts of poor timing

  • Pushing into a higher tax bracket: A large one-year conversion can create an unnecessary marginal‑rate jump and permanently raise future Medicare premiums (IRMAA) or taxability of Social Security.
  • Interaction with capital losses/gains: Conversions are ordinary income, so capital loss carryforwards don’t directly offset conversion income.
  • Estate and legacy effects: Roths grow tax-free and do not require lifetime RMDs for the original owner; moving assets to a Roth before retirement can simplify estate planning and reduce tax drag for heirs.

Practical strategies I use with clients
1) Targeted partial conversions: Convert only enough each year to fill a gap in taxable income up to a target bracket. This balances paying tax today against preserving lower‑bracket space in future years. See our guide on pros and cons of staggered conversions for examples and calculations: “Pros and Cons of Partial Roth Conversions Over Several Years” (https://finhelp.io/glossary/pros-and-cons-of-partial-roth-conversions-over-several-years/).

2) Low-income year conversion windows: If you expect a year with drop in earned income (career change, sabbatical, early retirement), that window can be the most tax-efficient time to convert. Our step-by-step piece on using low-income years explains how to layer conversions into those periods: “How to Use Roth Conversions Strategically in Low-Income Years” (https://finhelp.io/glossary/how-to-use-roth-conversions-strategically-in-low-income-years/).

3) Market timing with tax awareness: Converting after significant market declines reduces tax owed today. Be mindful: you trigger ordinary income tax but reduce future taxable recovery. I often recommend partial conversions immediately after a year like 2022-style drawdown to clients who can pay the tax from outside retirement funds.

4) Watch means-tested programs: Conversions can temporarily raise MAGI for the year, impacting Medicare premiums (IRMAA), the Net Investment Income Tax (3.8% NIIT threshold), and the taxable portion of Social Security benefits. Model the combined effect before executing large conversions.

5) Roth ladders for early retirees: If you retire before age 59½ and want to avoid penalties later, build a conversion ladder—convert taxable amounts early, wait five years for each converted tranche, and then withdraw converted principal penalty-free when needed (observe the five-year conversion rule for each tranche).

Examples (simplified, anonymized)

  • Example A: A client shifted careers and earned $35,000 in a transition year. I recommended a $40,000 conversion. Because their other income was low, the conversion was absorbed in lower tax brackets and the tax cost was far lower than if they converted the same amount after returning to a six‑figure salary.

  • Example B: Married couple with large traditional IRA and anticipated higher future income used a three‑year plan to convert $100,000 total. We capped conversions at a target bracket each year to avoid a rate jump and saved tens of thousands compared with converting all at once.

Pitfalls and mistakes to avoid

  • Ignoring Form 8606 and pro‑rata rules: If you have any nondeductible contributions, conversions require pro‑rata calculations; thinking you can convert only the after‑tax portion without accounting for pre‑tax balances is a costly error. See IRS Pub 590-A.
  • Using IRA funds to pay conversion tax: Where possible, use outside cash to pay conversion taxes to maximize the benefit of tax-free growth inside the Roth.
  • Not modeling Medicare and tax-phaseout effects: Large conversions can trigger higher Part B/D premiums for years. Always model IRMAA exposure before large conversions.

When conversions don’t make sense

  • High current tax rates with uncertain future: If you’re already in a high bracket and expect lower future tax rates (e.g., planning to retire in a lower bracket), conversion loses appeal.
  • Near-term cash constraints: If paying the conversion tax requires dipping into retirement funds that will reduce retirement income, pause.
  • Short investment horizon: If you plan to withdraw the funds within a few years, the upfront tax may not be offset by future tax-free growth.

Interaction with RMDs and SECURE 2.0
SECURE 2.0 raised the RMD age to 73 starting in 2023, and further changes are scheduled for future years. Converting before required beginning dates can eliminate future RMDs on the converted amounts because Roth IRAs are not subject to owner RMDs. That can be especially valuable for clients who do not need retirement distributions and want to shrink taxable estates.

Checklist before converting (practical pre-conversion test)

  • Model the tax bill for the conversion year and following 2–3 years.
  • Verify whether conversion increases Medicare IRMAA or triggers NIIT or Social Security taxation.
  • Confirm basis and pro‑rata calculations if you have nondeductible contributions (file Form 8606 where required).
  • Decide source of funds to pay the conversion tax (prefer outside funds).
  • Consider partial conversions and a multi-year plan to avoid bracket creep.

Resources and further reading

Professional disclaimer
This article is educational and reflects general tax and retirement planning principles as of 2025. It is not personalized tax, legal, or investment advice. In my practice I run year-by-year tax projections before recommending conversion amounts—your situation may differ. Consult a CPA or a fee-only financial planner to model IRA conversions specific to your income, deductions, and estate goals.

Bottom line
IRA conversion timing is a tax and planning decision with outsized effects on lifetime taxes, Medicare costs, and estate outcomes. Thoughtful, staged conversions during lower-income years or after market declines—paired with attention to Form 8606, IRMAA exposure, and the five‑year rules—are the best practices I use with clients. For step‑by‑step conversion tactics and examples, review our related guides on staggered conversions and low‑income year strategies linked above.