Roth Conversions and RMDs

What You Need to Know

Learn how shifting your IRA into a Roth IRA can help you enjoy tax-free, RMD-free withdrawals throughout retirement

Roth Conversion

What exactly is a Roth Conversion?

A Roth Conversion is the process of taking money or assets from a tax-deferred account (such as a Traditional 401(k) or Traditional IRA) and transferring them to a Roth IRA, which is a tax-free account.

Upon transferring the assets, the converted amount is considered ordinary income to you in the year of the conversion. This means you must pay income tax on that amount today.

You are the one who decides the exact amount of money or assets you wish to transfer, unlike salaries or bonuses, where a third party determines your income. This allows you to be your “own boss” and control the limit of your current tax bracket.

There are three main reasons:

  • Future Tax Increase: If you believe federal tax rates will be higher in the future (due to the country’s deficit).
  • Personal Tax Bracket: If your future RMDs will push you into a higher tax bracket than you are in today.
  • Spousal Death: In the future, the surviving spouse will no longer file taxes as Married Filing Jointly, which drastically reduces their deductions and effectively pushes them into a higher tax bracket.

Required Minimum Distributions (RMDs)

What are RMDs and why do they exist?

RMDs (Required Minimum Distributions) are mandatory minimum distributions that the IRS requires you to withdraw from certain retirement accounts. They exist because the IRS has been your “partner” in those tax-deferred accounts and now demands its share.

Accounts with RMDs (Tax-Deferred): Traditional 401(k)s, Traditional IRAs, SEP IRAs, 457, Simple IRAs, and 403(b)s.

Accounts WITHOUT RMDs (Tax-Free): Roth IRAs and Roth 401(k)s (since you paid taxes on contributions).

The RMD starting age has been extended by the Secure Act 2.0 legislation (formerly 70.5 and 72 years). Currently, the age depends on the year of birth:

Born between 1951 and 1959: 73 years old.

Born in 1960 or later: 75 years old.

The calculation is based on the balance of all your tax-deferred accounts as of December 31 of the previous year, divided by a Life Expectancy Factor (or Uniform Lifetime Table Factor) provided by the IRS.

Example: If the total balance is $3,000,000 and your factor is 26.5 (for an individual aged 73), your RMD would be $113,208. This factor decreases each year, forcing you to withdraw a larger portion over time.

Since the tax system is progressive, if your RMDs are large enough (due to account growth), that forced withdrawal is added to all your other income. It can push you into a significantly higher marginal tax bracket

(Example:  going from 22% to 32%), resulting in you paying more in taxes in retirement than in your working years.

Strategy and Planning

What is the "Tax Optimization Valley" and how is it used?

It is the period of time between your early retirement (when your annual income drops sharply) and the start of your RMDs. In this valley, your income is low, which allows you to perform strategic Roth Conversions to “fill up” those low tax brackets (e.g., 12% or 24%). This helps flatten the tax curve in the future and reduces the base used to calculate your RMDs.

For non-spouse beneficiaries (such as children):

  • Traditional Accounts: They have the “10-year rule,” which allows withdrawals of everything. Each withdrawal is subject to taxes, and if they wait until the end, the total amount can push the heirs into their highest tax brackets, causing them to lose value.
  • Roth Accounts: Heirs also have the 10-year rule, but all withdrawals are tax-free, preserving the total value of the inheritance.

Conversion is not suitable if:

  • Your current tax rates are higher than what you expect in the future (and RMDs won’t push you into a higher bracket).
  • Your life expectancy is very short (the conversion needs time and growth to be adequate).
  • You need the converted money immediately for daily expenses.
  • You would lose essential subsidies (e.g., under the Affordable Care Act) by increasing your income through the conversion.
  • You transfer aggressive assets (stocks) to the Roth but then invest them conservatively (bonds), reducing the potential for tax-free growth.

Yes. Roth Conversions are added to your income (AGI), which can increase the Modified Adjusted Gross Income (MAGI) used to calculate your Medicare Parts B and D premiums (known as IRMAA). Although the increase may not be significant relative to the long-term tax savings, it is a key variable that a planner must model.

No, in most cases. The goal is optimization, not conversion maximization. Converting a considerable amount can be counterproductive for two reasons:

  • Loss of Capital: Giving a large portion of your capital to the IRS in taxes today means losing the effect of compound interest on that money.
  • Unnecessary Bracket Increase: It can push you into a higher tax bracket, reversing the purpose of the optimization strategy and potentially increasing your IRMAA premiums.
  • A planner must use sophisticated software to model:
  • Your tax bracket (today and future).
  • The impact on Medicare premiums (IRMAA).
  • The balance of future RMDs.
  • The composition of investments in each account.
  • Your cash flow needs versus your legacy goals.

You should look for a CFP financial advisor who meets two key criteria: they are a Fiduciary, and they are Fee-Only. Specifically, you should seek an expert in Roth Conversions who offers their services on an hourly basis. This ensures their interests are aligned with yours, and the advisor focuses only on the tax strategy without obligating you to change the management of your assets.

Next Steps for Your Retirement

I want a personalized plan. How do I know if the Roth Conversion strategies are right for me?

Every situation is unique. The only way to know if a Roth Conversion strategy is right for you is with a personalized analysis of your financial situation and goals. We would be delighted to help you create a plan. If you feel ready to take control of your tax future, choose the path that best suits you:

  • Download the Free Guide: Get your complete and detailed resource now to master Roth Conversions and RMDs.
  • Sign Up for Our Monthly Webinar: Join our next session to get answers to your questions in real-time and learn about the latest tax news for retirees.
  • Schedule a Free Consultation: The best plan is the one that fits you. Let’s talk about your goals with no obligation.
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