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You're approaching retirement with a healthy traditional IRA or 401(k) balance. That's great—except for one problem: Every dollar you withdraw in retirement will be taxed as ordinary income.
But what if there was a way to convert some of that tax-deferred money into tax-free money before you retire—potentially saving you tens of thousands of dollars over your lifetime?
That's the power of Roth conversions done strategically in the years leading up to and shortly after retirement.
At Chesapeake Financial Planners, we help pre-retirees and early retirees identify opportunities to convert traditional IRA funds to Roth IRAs at favorable tax rates—reducing future taxes and creating more flexibility in retirement.
What is a Roth conversion?
A Roth conversion is the process of moving money from a traditional IRA or 401(k) into a Roth IRA. You pay taxes on the converted amount in the year of the conversion, but in exchange, all future growth and withdrawals are tax-free.
Think of it as prepaying your taxes at today's rates to avoid paying them at potentially higher rates in the future.
Why Roth conversions make sense before retirement
1. You may be in a lower tax bracket
If you retire before age 73 (when Required Minimum Distributions begin), you may have several years of lower income—especially if you delay claiming Social Security.
Example:
- While working, you're in the 24% or 32% tax bracket
- After retirement, your taxable income drops to the 12% or 22% bracket
- Converting during these low-income years lets you "fill up" those lower brackets before RMDs force large withdrawals later
2. You can avoid higher taxes in the future
Tax rates are historically low right now (under the Tax Cuts and Jobs Act), but many provisions are set to expire after 2025. If tax rates increase—or if your retirement income pushes you into higher brackets due to RMDs—you'll pay more taxes later.
By converting now, you lock in today's rates and avoid the uncertainty of future tax policy.
3. Roth IRAs aren't subject to Required Minimum Distributions (RMDs)
Traditional IRAs force you to start taking withdrawals at age 73, whether you need the money or not. Those RMDs are taxed as ordinary income and can:
- Push you into higher tax brackets
- Increase taxes on your Social Security benefits
- Trigger Medicare premium surcharges (IRMAA)
Roth IRAs have no RMDs during your lifetime, giving you more control over your taxable income in retirement.
4. You create tax-free flexibility
Roth withdrawals don't count as taxable income. This gives you strategic flexibility to:
- Manage your tax bracket year by year
- Keep your income below thresholds that trigger Social Security taxation or IRMAA
- Provide tax-free income during high-expense years
5. You leave a better inheritance
Roth IRAs pass to heirs tax-free, whereas inherited traditional IRAs are taxed when withdrawn. While the SECURE Act requires most non-spouse beneficiaries to empty inherited IRAs within 10 years, Roth IRAs are still a more tax-efficient legacy asset.
The ideal timing windows for Roth conversions
Window 1: The year you retire (before year-end)
If you retire mid-year, you may have only a partial year of income. This creates a window to convert at lower rates before your next full year of retirement income begins.
Window 2: Between retirement and Social Security (ages 62–70)
Many retirees delay claiming Social Security to maximize their benefit. Those years between retirement and claiming can be prime conversion years—especially if you're living off taxable account withdrawals or part-time income.
Window 3: Before RMDs begin (ages 65–72)
Once RMDs kick in at age 73, they'll push your income higher, making conversions more expensive. The years leading up to RMDs are your last chance to convert at potentially lower rates.
Window 4: Market downturns
When the market declines, your IRA balance is temporarily lower—meaning you can convert more shares for the same tax bill. When the market recovers, that growth happens inside your Roth, tax-free.
How much should you convert each year?
There's no one-size-fits-all answer, but here are common strategies:
Strategy 1: Fill up your current tax bracket
Convert enough each year to stay within your current tax bracket without spilling into the next one.
Example: If you're married filing jointly in the 12% bracket (up to ~$94,000 of taxable income in 2024), and you have $60,000 of income from other sources, you could convert up to $34,000 and stay in the 12% bracket.
Strategy 2: Convert up to a target bracket
Some retirees are comfortable converting enough to "fill up" the 22% or even 24% bracket if they expect to be in higher brackets later due to RMDs or pension income.
Strategy 3: Convert based on future RMD projections
We model what your RMDs will look like at age 73 and work backward—converting enough each year to reduce future RMDs and keep your income in a desired range.
Strategy 4: Dollar-cost average conversions
Instead of converting a large amount in one year, spread conversions over multiple years to smooth out tax liability and manage cash flow.
What you'll pay in taxes
Roth conversions are taxed as ordinary income in the year of the conversion. The converted amount is added to your other income for the year.
Important: Conversions do not trigger the 10% early withdrawal penalty—even if you're under 59½—as long as the funds go directly from your traditional IRA to your Roth IRA.
Tax payment strategies:
- Withhold taxes from the conversion (simple, but reduces the amount that goes into your Roth)
- Pay taxes from other sources (better, because the full conversion amount goes into your Roth and compounds tax-free)
- Adjust withholding from other income sources (Social Security, pensions, or W-2 wages) to cover conversion taxes
Common Roth conversion mistakes to avoid
1. Converting too much in one year
Converting a large amount can push you into a higher tax bracket, trigger IRMAA surcharges on Medicare premiums, or increase taxes on Social Security benefits. Spreading conversions over multiple years is often more tax-efficient.
2. Not planning for the tax bill
Roth conversions aren't free—you owe taxes in the year of conversion. Make sure you have cash available to pay the bill without dipping into the conversion itself.
3. Converting after enrolling in Medicare without considering IRMAA
Large conversions can increase your Modified Adjusted Gross Income (MAGI), triggering higher Medicare premiums two years later. We help you model this to avoid surprises.
4. Forgetting about the 5-year rule
While you can withdraw your Roth contributions anytime tax-free, each conversion has its own 5-year clock before you can withdraw the converted amount penalty-free (if you're under 59½). Plan accordingly if you may need access to those funds.
5. Not coordinating with your overall tax strategy
Roth conversions should be part of a comprehensive tax plan that considers all your income sources, deductions, and long-term goals. Work with a financial advisor and CPA to optimize the strategy.
Is a Roth conversion right for you?
Roth conversions make the most sense if:
✅ You're in a lower tax bracket now than you expect to be in retirement
✅ You have cash available to pay the conversion taxes (ideally from non-retirement accounts)
✅ You have time for the Roth assets to grow (ideally 5–10+ years before you need withdrawals)
✅ You want to reduce future RMDs and create tax-free flexibility
✅ You're concerned about future tax rate increases
✅ You want to leave tax-free assets to heirs
Roth conversions may not make sense if:
❌ You're already in a high tax bracket and expect to be in a lower bracket in retirement
❌ You need the IRA money soon and can't afford to pay the taxes now
❌ You're close to retirement and won't benefit from years of tax-free growth
❌ Your estate is large enough to face estate taxes (there may be better strategies)
How we help at Chesapeake Financial Planners
Roth conversions are a powerful strategy—but only when done thoughtfully. We help clients:
- Model conversions across multiple years to identify optimal amounts
- Coordinate conversions with Social Security claiming strategies
- Avoid triggering IRMAA or increasing Social Security taxation
- Work with your CPA to execute conversions tax-efficiently
- Revisit the strategy annually to adapt to changes in tax law, income, or goals
Your next step
The window for tax-efficient Roth conversions won't stay open forever. Once RMDs begin or tax rates increase, the opportunity to convert at favorable rates may be gone.
If you're within 10 years of retirement—or recently retired—now is the time to explore whether Roth conversions make sense for your situation.
Ready to reduce your future tax bill? Schedule a complimentary consultation with Chesapeake Financial Planners today.
This material is for educational purposes only and is not intended as tax advice. Roth IRA conversions are taxable in the year of conversion. Please consult with your tax advisor regarding your specific situation. Tax laws are subject to change.
Roth IRA withdrawals are tax-free if you meet the 5-year rule and are over age 59½. Early withdrawals may be subject to penalties and taxes.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial.
Chesapeake Financial Planners | 2402 Scotlon Ct, Forest Hill, MD 21050 | (410) 652-7868 | www.chesapeakefp.com