Today’s episode takes a closer look at one of the hottest topics in retirement planning: Roth conversions. With so much buzz on social media and in the personal finance world, it can feel like everyone is making a Roth conversion—but is it right for you? I discuss how Roth conversions work, who is eligible, the benefits, the tax implications, and important considerations like required minimum distributions, charitable giving, and Medicare premiums. Whether you’re feeling a bit of Roth conversion FOMO or just curious about the reality behind the hype, this episode offers practical insights and guidance to help you decide whether a Roth conversion belongs in your retirement strategy.
You will want to hear this episode if you are interested in...
[01:30] Tax-free vs. taxable income in retirement
[04:59] Roth conversion rules and benefits
[07:36] Medicare IRMAA and Roth conversions
[11:09] Intention to leave a tax-free inheritance
[12:16] How to process a Roth conversion
[13:28] Year-end financial planning tips
The Roth Conversion Perception vs. Reality
There's a lot of Roth conversion chatter online, leading many to believe that “everyone” is jumping on the opportunity. Yet, statistics tell a different story. Data from the Investment Company Institute revealed that in 2023, only 1.6 million Roth conversions occurred, representing just $36.7 billion out of a staggering $17 trillion held in traditional IRAs nationwide. Fidelity also reported that only 2% of IRA customers completed Roth conversions in a recent year. So it looks like actual conversions remain the exception, not the rule.
Understanding Who Can (and Can’t) Convert
A key theme that emerged was the flexibility of Roth conversions. Anyone, regardless of age—even those under 59½—can do a Roth conversion, so long as the money is moved from a traditional IRA or eligible retirement plan. However, not all inherited IRAs are eligible. Only IRAs inherited from a spouse may be converted; non-spousal inherited IRAs cannot. Additionally, conversions don’t need to be all-or-nothing; partial conversions are allowed and often advisable.
There is also a five-year rule: every Roth conversion starts a new five-year clock. If funds from the conversion are withdrawn before five years (and before reaching age 59½), taxes or penalties may apply to any earnings withdrawn.
Who Stands to Gain?
Several points were raised, including who truly benefits from converting. Generally, if you’re in a lower tax bracket now but expect to be in a higher bracket later—due to RMDs, pensions, or legislative tax increases—a Roth conversion can lock in today’s lower tax rate on your retirement savings.
Avoiding required minimum distributions (RMDs) is another crucial incentive. RMDs from traditional accounts become mandatory at age 73 or 75, depending on your birth year, and can force you into a higher tax bracket. Systematic Roth conversions can reduce future RMD obligations, offering more control over taxable income in retirement. If a tax-free inheritance for beneficiaries is a priority, prepaying the taxes now via conversion allows heirs to enjoy tax-free withdrawals later.
When Does a Roth Conversion Not Make Sense?
The discussion explored scenarios where a conversion might be counterproductive. If you expect to drop into a lower tax bracket in retirement, staying put with your traditional IRA could save taxes overall. High-income years are generally a poor time to convert, as you’ll pay taxes at your (currently) elevated rate.
Other circumstances that may negate the benefits include:
Triggering Medicare IRMAA surcharges due to increased taxable income
Plans to make qualified charitable distributions of RMDs, which are already tax-neutral
Limited life expectancy, where the long-term, tax-free benefit may not have time to materialize
Tax and Implementation Considerations
The tax you owe in your conversion year is based on your total taxable income, including earned income, retirement income, and Social Security. Paying conversion taxes from outside funds, rather than the IRA, amplifies future growth potential. Ideally, you make conversions in low-income years or early in retirement, when you remain in a lower tax bracket (12% is typically optimal). Proper record-keeping and filing IRS Form 8606 are essential steps for accurate reporting.