Roth conversions and tax bracket management

Most investors think of Roth conversions as a technical IRA maneuver. They're actually a strategic decision about when to pay taxes — and paying taxes at the right time can save hundreds of thousands of dollars over a retirement.

The core question is simple: Would you rather pay taxes now at today's rate, or later at an unknown future rate? If you can convert in a year when your rate is unusually low, the math overwhelmingly favors converting.

How a Roth conversion works

1. You move some or all of a traditional IRA (or 401(k) rolled into an IRA) into a Roth IRA.
2. The converted amount is added to your ordinary income for the year and taxed at your marginal rate.
3. Once in the Roth, the money grows tax-free and is withdrawn tax-free in retirement (assuming you're over 59½ and the Roth has been open 5+ years).
4. Roth IRAs have no Required Minimum Distributions (RMDs) during the owner's lifetime.

The key: you're prepaying the tax bill now, at a known rate, in exchange for tax-free growth forever.

The conversion window

Not every year is a good year to convert. The value of a Roth conversion depends entirely on the tax rate you pay on the conversion relative to the rate you'd pay on future withdrawals.

Good conversion years (low current income):

• Early retirement before Social Security begins (ages 62–70)
• A sabbatical or career transition year
• A year with large deductions (medical, charitable)
• Years when the tax code offers historically low rates

Bad conversion years (high current income):

• Peak earning years when you're already in the 32–37% bracket
• A year when a conversion would push you into the next bracket
• Years with large one-time income (stock option exercise, property sale)

The sweet spot is converting just enough to "fill up" a lower bracket without spilling into the next one.

Bracket filling: the precision tool

Federal tax brackets in 2026 (married filing jointly, approximate):

| Bracket | Taxable income range | |---|---| | 10% | $0 – $23,850 | | 12% | $23,851 – $96,950 | | 22% | $96,951 – $206,700 | | 24% | $206,701 – $394,600 | | 32% | $394,601 – $501,050 | | 35% | $501,051 – $751,600 | | 37% | Over $751,600 |

If a retired couple has $50,000 of taxable income (Social Security, small pension), they have room to convert roughly $157,000 into a Roth and stay within the 22% bracket ($206,700 – $50,000). Paying 22% now to avoid 24–32% later — especially once RMDs, Social Security taxation, and Medicare surcharges kick in — is a winning trade.

The RMD problem Roth conversions solve

At age 73, the IRS requires you to start taking minimum distributions from traditional IRAs and 401(k)s — whether you need the money or not. These RMDs are taxed as ordinary income.

For someone with a large traditional IRA, RMDs can push them into a higher bracket than they ever were during their working years. A $2M traditional IRA at age 73 requires an RMD of roughly $75,000 in the first year — and the amount grows each year as life expectancy tables shorten.

Worse, RMD income can:

• Push Social Security benefits into the taxable range (up to 85% taxable)
• Trigger IRMAA — income-related Medicare premium surcharges of $1,000–$5,000+ per year per person
• Eliminate eligibility for certain deductions and credits

Strategic Roth conversions in the years before 73 reduce the traditional IRA balance, reduce future RMDs, and reduce the cascade of tax complications they create.

What this means for the Hendersons

David plans to retire at 65. The years between 65 and 70 — before Social Security kicks in and before RMDs begin — are the Hendersons' golden conversion window. With David's $620K 401(k) rolled into a traditional IRA, they could convert $100K–$150K per year during those five years, paying taxes at the 22% bracket instead of the 24–32% bracket they'd likely face once RMDs and Social Security stack together. Over five years, they could convert $500K–$750K, saving potentially $50,000–$100,000 in lifetime taxes. Linda's Roth ($180K) is already in the best possible position — every dollar there grows and comes out tax-free.

What this means for Jordan

Jordan is in peak earning years at 34 and likely in the 22–24% bracket. A Roth conversion now isn't clearly advantageous — Jordan is already contributing to a Roth IRA, which is the right move. The conversion opportunity will come later if Jordan downshifts careers at 50 (a stated goal). Those lower-income years would create a conversion window for the 401(k), which should remain traditional for now to capture the tax deduction at the current rate. The key insight for Jordan: the Roth decision isn't binary. It's about timing.

Key takeaways

1. A Roth conversion moves pre-tax retirement money into a Roth IRA, paying taxes now for tax-free growth and withdrawals forever.
2. The value of converting depends on paying a lower tax rate now than you'd pay on future withdrawals.
3. The "conversion window" — years of temporarily low income, often early retirement — is the optimal time to convert.
4. Bracket filling means converting just enough to fill a lower bracket without crossing into the next one.
5. Roth conversions reduce future RMDs and the cascade of tax complications they create (Social Security taxation, Medicare surcharges).

Glossary

• Roth conversion — Moving money from a traditional (pre-tax) retirement account into a Roth IRA, paying income taxes on the converted amount.
• Required Minimum Distribution (RMD) — The minimum amount the IRS requires you to withdraw from traditional retirement accounts annually starting at age 73.
• Marginal tax rate — The tax rate applied to the last dollar of income. Conversions are taxed at your marginal rate.
• Bracket filling — Converting just enough to use up the remaining space in a lower tax bracket, avoiding a jump to the next bracket.
• IRMAA — Income-Related Monthly Adjustment Amount. A surcharge added to Medicare premiums when income exceeds certain thresholds.
• Conversion window — A period of temporarily lower income during which Roth conversions can be made at a lower tax rate than usual.