Roth Conversions: Is Paying Taxes Now Worth It?

Picture this: You're 63, recently retired with a $800,000 traditional IRA. You did everything right, maxed out contributions, earned decent returns. But here's what most people don't realize until it's too late: that money is sitting in your account with a growing tax bill attached.

When you turn 73, the IRS will force you to start taking Required Minimum Distributions (RMDs). Combined with Social Security income, those withdrawals could push you into a higher tax bracket than you're in right now. Suddenly, you're paying 24% or even 32% federal tax on money you could have converted at 12% or 22% just a few years earlier.

This is where Roth conversions enter the picture. The basic idea is simple: convert money from your traditional IRA or 401(k) to a Roth IRA, pay taxes on the converted amount now, and enjoy completely tax-free withdrawals in retirement. No RMDs, no taxes on growth, no surprises.

But here's the million-dollar question: Is paying those taxes today actually worth it?

Let's break down the mechanics so you can understand exactly what happens when you convert IRA to Roth.

The Conversion Process:

• You decide how much to convert from your traditional IRA or 401(k) to a Roth IRA
• That amount gets added to your taxable income for the year
• You pay ordinary income tax on the conversion (no early withdrawal penalty, even if you're under 59½)
• The money then grows tax-free in your Roth IRA forever
• After five years and age 59½, you can withdraw everything tax-free

Here's what makes conversions different from regular Roth contributions: there's no income limit and no annual contribution cap. While high earners can't contribute directly to a Roth IRA (phaseout starts at $146,000 for singles, $230,000 for married couples in 2024), anyone can convert.

Think of it like refinancing a mortgage. You're essentially refinancing your tax bill, betting that paying taxes at today's rates will be cheaper than paying at tomorrow's rates. But just like refinancing, the math needs to work in your favor.

Here's where we get into the numbers that really matter. Whether a Roth conversion makes sense comes down to three key factors:

1. Tax Rate Today vs. Tax Rate Tomorrow

This is the big one. If you're in the 12% tax bracket now but expect to be in the 24% bracket in retirement, converting is a no-brainer. You're essentially getting a 50% discount on your future tax bill.

Let's say you convert $50,000 while in the 12% bracket. You'll pay $6,000 in taxes now. If that same money would be taxed at 24% later, you'd pay $12,000. You just saved $6,000, plus that money grows tax-free.

2. Time Until You Need the Money

The longer your money can grow tax-free in the Roth, the more valuable the conversion becomes. Here's a simple example:

Convert $100,000 at a 22% tax rate (pay $22,000 in taxes). Assume 7% annual growth:

• After 10 years: Worth $196,715 (all tax-free)
• After 20 years: Worth $386,968 (all tax-free)
• After 30 years: Worth $761,226 (all tax-free)

If you'd kept that money in a traditional IRA and withdrawn it at a 24% tax rate, you'd pay over $183,000 in taxes on the 30-year scenario. Your net: $578,226. By converting, you kept an extra $183,000.

3. Where the Tax Payment Comes From

This is crucial and often overlooked. Conversions work best when you can pay the tax bill from money outside your retirement accounts. Here's why:

If you convert $100,000 but have to withdraw $22,000 from that IRA to pay the taxes, you're really only converting $78,000. But if you pay that $22,000 from a savings account or taxable brokerage account, the full $100,000 compounds tax-free in your Roth. That's a huge difference over 20 or 30 years.

Here's the Roth conversion strategy that savvy pre-retirees use: take advantage of the gap years between when you retire and when your other income sources kick in.

Most people retire somewhere between 62 and 67. But Social Security doesn't reach full value until 67 (or 70 if you delay), and RMDs don't start until 73. That creates a 5 to 10 year window where your taxable income might be surprisingly low.

Real-World Example:

Meet Sarah, age 64. She retired last year with $900,000 in her traditional IRA. She's living on savings and delaying Social Security until age 70. Without any other income, Sarah is in a uniquely low tax bracket.

Sarah's strategy: Convert just enough each year to fill up the 12% federal tax bracket (up to $94,300 for married filing jointly in 2024). Over six years, she converts nearly $560,000, paying roughly 12% federal plus state taxes. When RMDs and Social Security kick in at 73, she'll be in a much higher bracket, but most of her retirement savings are now in tax-free Roth accounts.

By age 80, this strategy could save Sarah and her spouse over $200,000 in taxes compared to leaving everything in traditional IRAs.

Why These Gap Years Matter:

• No W-2 income pushing you into higher brackets
• Full control over your taxable income through conversion amounts
• Time to spread conversions across multiple years
• Ability to adjust strategy each year based on tax law changes
• Reduces future RMDs that could trigger Medicare premium surcharges

This is the window where you have maximum flexibility. Once Social Security starts and RMDs begin, you lose control over your income, and conversions become much more expensive.

Conversions aren't right for everyone. Here are the situations where they tend to work best:

You're an ideal candidate if:

• You're in early retirement with low current income. This is the sweet spot we discussed above.
• You expect higher taxes later. Maybe you have a pension starting soon, a large inheritance coming, or real estate that will generate rental income.
• You don't need the IRA money for 10+ years. The longer the runway, the more valuable tax-free growth becomes.
• You have cash to pay the tax bill. Using non-retirement money to pay conversion taxes dramatically improves the math.
• You want to leave tax-free money to heirs. Beneficiaries must empty inherited IRAs within 10 years now, but inherited Roth IRAs come out tax-free.
• You're worried about future RMDs pushing you into higher brackets or causing Medicare premium increases (IRMAA surcharges kick in above $103,000 for singles, $206,000 for couples in 2024).

Conversions might not make sense if:

• You're currently in a high tax bracket. If you're earning $250,000 a year, you're probably in the 24% or 32% bracket. Unless you expect to be in the 35% or 37% bracket later (unlikely for most retirees), wait.
• You'll be in a lower bracket in retirement. Some people genuinely will have less income later, especially if they have modest savings and won't have pensions.
• You need the IRA money soon. If you're converting money you'll need to withdraw in 3-5 years, the tax-free growth won't offset the upfront tax cost.
• Your state has high income taxes and you're planning to move. If you're in California (up to 13.3% state tax) but retiring to Florida (0% state tax), you might want to wait until after the move to convert.

Ready to consider a conversion? Here's your step-by-step approach:

Step 1: Project Your Tax Brackets

Estimate your taxable income for this year and future years. Include wages, Social Security (up to 85% is taxable), pensions, RMDs, and investment income. The IRS has seven federal brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your goal is to identify years where you're in a relatively low bracket.

Step 2: Calculate Your Conversion Capacity

Figure out how much you can convert while staying in your target bracket. For example, if you're married filing jointly with $50,000 in taxable income, you could convert about $44,000 and stay in the 12% bracket (which tops out at $94,300 in 2024).

Step 3: Consider State Taxes

Don't forget state income taxes. Nine states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire). If you live in a high-tax state, add 5-10% to your conversion cost.

Step 4: Determine Tax Payment Source

Ideally, pay the taxes from savings, taxable brokerage accounts, or other non-retirement sources. If you must use IRA money for taxes, factor that into your conversion amount.

Step 5: Execute the Conversion

Contact your IRA custodian (Fidelity, Vanguard, Schwab, etc.) and request a Roth conversion. Most can be done online or with a phone call. You'll simply move money from your traditional IRA to your Roth IRA. The custodian will report this to the IRS on Form 1099-R.

Step 6: Set Aside Money for Taxes

The conversion doesn't trigger withholding automatically. You'll pay the taxes when you file your return, so either increase estimated quarterly payments or be prepared for a bigger tax bill in April.

Step 7: Consider Multi-Year Conversions

Instead of one massive conversion, spread it over several years. This keeps you from jumping into higher brackets and gives you flexibility to adjust if tax laws change or your situation shifts.

Pro Tip: Do conversions early in the year. This gives your converted money more time to grow tax-free before the five-year clock starts. Plus, if the market drops after your conversion, you have time to potentially convert more later in the year while your converted amount has shrunk.

Even with the best intentions, people make costly errors. Here are the traps to watch out for:

Mistake 1: Converting Too Much at Once

Converting $200,000 in one year could push you from the 12% bracket into the 24% bracket. You'd pay 24% on a big chunk of that conversion. Better to convert $50,000 over four years and stay in the lower bracket.

Mistake 2: Ignoring Medicare Premium Impacts

High-income Medicare beneficiaries pay surcharges called IRMAA (Income-Related Monthly Adjustment Amount). A big conversion could push your modified adjusted gross income over the threshold, costing you $2,000 to $6,000+ in extra Medicare premiums two years later. Medicare looks at your income from two years prior, so a conversion at age 63 affects your premiums at age 65.

Mistake 3: Not Having Cash for Taxes

Using retirement money to pay conversion taxes defeats much of the purpose. That withdrawn money never gets to grow tax-free. Always try to pay taxes from outside accounts.

Mistake 4: Converting Right Before You Need the Money

Remember the five-year rule: converted amounts must stay in the Roth for five years to avoid penalties on withdrawals (though you can always withdraw your conversion principal penalty-free after paying the taxes). If you're 58 and need money at 60, a conversion creates complications.

Mistake 5: Forgetting About the Pro-Rata Rule

If you have both pre-tax and after-tax money in traditional IRAs (from non-deductible contributions), you can't just convert the after-tax portion. The IRS makes you convert proportionally. This complicates the tax calculation and often surprises people. An experienced tax professional can help navigate this.

Mistake 6: Not Considering Your Legacy

If leaving money to heirs is important, remember that beneficiaries must empty inherited IRAs within 10 years under current law. That compressed timeline often pushes them into high brackets. A Roth IRA inheritance gives them tax-free withdrawals, which can be far more valuable.

Converting your traditional IRA to a Roth isn't about following a trend. It's about running the numbers for your specific situation and making a strategic decision about when to pay taxes.

The math works best when you can convert during low-income years (especially those golden gap years in early retirement), pay taxes from non-retirement accounts, and give the money time to grow. Over a 20 or 30-year retirement, paying 12% or 22% now instead of 24% or 32% later can literally save you hundreds of thousands of dollars.

But it's not automatic. If you're in a high bracket now, expect to be in a lower bracket later, or need your IRA money soon, conversions might not make sense. Every situation is different.

The key is to think beyond this year's tax return and consider your lifetime tax bill. That shift in perspective is what separates people who optimize their retirement from those who just react year by year.

Your next steps: Calculate your current tax bracket, project your future income sources, and identify potential conversion windows. Consider running scenarios with different conversion amounts. And most importantly, talk to a qualified tax professional or financial advisor who can model your specific situation. The right conversion strategy could be one of the most valuable financial moves you make in your 60s.

Important Disclaimer: This article is for educational purposes only and should not be considered financial or tax advice. fidser. is not a certified financial planning firm, and the information provided here is general in nature. Tax laws are complex and change frequently. Before making any Roth conversion decisions, please consult with a qualified tax professional or financial advisor who can analyze your specific situation, including your current and projected tax brackets, state tax implications, and overall financial goals. Individual circumstances vary widely, and what works for one person may not be appropriate for another.