The Roth Conversion Window Many Early Retirees Miss

Roth Conversions in Early Retirement: When They Make Sense and How to Evaluate Them

Lately I’ve been getting some questions about Roth conversions from people who have recently retired or are approaching retirement. Should we consider it? When does it make sense? What are the benefits? How much to convert? Is it worth it?

The purpose of this post is to help you start thinking about when a Roth conversion may be appropriate in early retirement. If you’d like a deeper explanation of what a Roth IRA is and how it works, I’d recommend starting with this article first: Understanding Roth IRAs: Your Guide to Smart Retirement Savings.

In its simplest form, a Roth conversion means moving money from a traditional IRA (pre-tax) to a Roth IRA (after-tax). When you do this, the amount converted is generally treated as taxable income in that year. In other words, you’re choosing to pay tax today in exchange for the ability to have that money grow and be withdrawn tax-free later.

At first glance, this raises a reasonable question: why would someone intentionally create taxable income? After all, most traditional tax planning advice centers on deferring tax as long as possible.

The answer is that for many early retirees, there is a window of time where their taxable income temporarily drops and that window creates an opportunity.

The Early Retirement Tax Window for Roth Conversions

Many retirees experience a period between their last paycheck, the start of Social Security, and the point where required minimum distributions (RMDs) begin. During those years, taxable income may be lower than it has been in decades. For someone retiring at 62, claiming Social Security at 67, and not facing RMDs until 73, that could create a five-to-ten-year period where thoughtful tax planning can have a meaningful impact.

Consider a simple example.

Imagine a couple who retire at age 62 with $2 million in traditional IRAs. Their income drops significantly once their salaries stop, and they plan to delay Social Security until age 67. During those five years, their taxable income may be substantially lower than it was while working. That period can create an opportunity to convert portions of their IRA to a Roth while remaining within relatively moderate tax brackets.

One strategy that sometimes makes sense during that window is gradually converting portions of a traditional IRA into a Roth IRA.

There are several potential benefits to doing this.

Creating Flexibility in Retirement Income

First, Roth assets can create flexibility in retirement cash flow planning. Imagine you’re retired and you need to replace the roof on your house, buy a car, or cover another large expense. If the funds come from a traditional IRA, the withdrawal increases your taxable income. If the funds come from a brokerage account, you may trigger capital gains.

In some cases, additional income can also push Medicare premiums higher due to IRMAA thresholds.

Withdrawals from a Roth IRA, however, do not increase taxable income. Having some assets in Roth accounts can give retirees more flexibility when managing taxes and income later in retirement.

Estate Planning Considerations

Roth accounts can also play an important role in estate planning. After the Secure Act was passed in 2019, most inherited traditional IRAs must be distributed within ten years, and every dollar withdrawn is taxed as ordinary income to the beneficiary. For heirs who are already in high tax brackets, that can significantly reduce the after-tax value of the inheritance.

By contrast, inherited Roth IRAs can continue growing tax-free during that ten-year period, and withdrawals are not taxable. For families thinking about wealth transfer across generations, that difference can be huge.

When Roth Conversions Tend to Make the Most Sense

In our experience, Roth conversions are often most valuable during the early years of retirement when income is temporarily lower.

During that time, retirees may have the opportunity to intentionally “fill up” lower tax brackets. For many households that might mean the 10% or 12% bracket. For others with larger tax-deferred balances, it may make sense to partially fill the 22% or 24% bracket.

In some situations — particularly where heirs are in very high tax brackets — converting at higher rates can still be worth considering.

The key is evaluating Roth conversions as part of a long-term retirement tax planning strategy, rather than viewing them as a one-time decision.

When It May Be Worth Looking at Roth Conversions More Closely

Roth conversions are worth evaluating when several of the following are true:

• You have recently retired or plan to retire in the next few years
• A large portion of your retirement savings is in traditional IRAs or 401(k)s
• You plan to delay Social Security for several years
• Required minimum distributions could push you into higher tax brackets later
• You would like more flexibility managing taxes during retirement

When more than one of these factors apply, it often makes sense to run projections to see whether a series of Roth conversions could reduce taxes over time.

Final Thoughts

Roth conversions are not appropriate for everyone. In some situations, paying tax today simply doesn’t make sense. The key is evaluating the decision in the context of a multi-year retirement tax strategy rather than looking at any single year in isolation.

For many early retirees with significant pre-tax retirement savings, the years immediately after retirement can create one of the most important tax planning windows of retirement.

If you’ve recently retired and are wondering whether Roth conversions might make sense in your situation, it’s a conversation worth having. Many of the conversations we have with new clients begin exactly this way.

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