Should You Do Roth Conversions After You Retire?

Retirement can create one of the better opportunities to consider a Roth conversion. Your paycheck can stop while Social Security and required minimum distributions can still be years away.

That can leave you with a period of lower taxable income and more control over how much income you recognize each year. A Roth conversion lets you use some of that opportunity intentionally.

But paying less tax over your lifetime isn’t necessarily the end goal. The more useful question is what you want the Roth conversion to accomplish.

Maybe you want more flexibility later in retirement. Maybe you’re concerned about the tax situation your spouse could face if you die first. Or maybe you want to leave your children an inheritance with fewer future tax consequences.

Those are problems a Roth conversion can help solve.

Quick Answer

Retirement can create a good opportunity for Roth conversions because your taxable income can fall after you stop working. During those lower-income years, you can move money from a traditional retirement account into a Roth account and intentionally pay tax at a rate you’re comfortable with.

The amount converted from a traditional IRA is generally included in taxable income for the year of the conversion. In exchange, future qualified Roth IRA distributions can be tax-free, and Roth IRAs do not require minimum distributions during the original owner’s lifetime.

The potential value of a conversion isn’t simply paying less tax. It can create more flexibility for you later in retirement, reduce the amount of tax-deferred money a surviving spouse could inherit, or leave children assets with fewer future income-tax consequences.

The decision starts with understanding which of those problems, if any, you’re trying to solve.

What Is a Roth Conversion?

A Roth conversion moves money from a traditional tax-deferred retirement account into a Roth account. For example, you might convert $50,000 from a traditional IRA into a Roth IRA.

The taxable portion of that conversion is generally included in your income for that year. You’re choosing to pay income tax now rather than leaving the money in the traditional account and paying income tax when taxable distributions are taken later.

Once the money is in the Roth IRA, future qualified distributions can be tax-free. That tradeoff is what makes the decision interesting: you’re voluntarily creating a tax bill today because having more money in a tax-free account can be useful later.

Why Can Retirement Be a Good Time for Roth Conversions?

The opportunity often appears when your income changes. While you’re working, your salary, bonus, business income, or other earnings can already use much of the tax brackets you’re comfortable paying.

Then you retire. Your earned income stops, but other sources of taxable income might not begin immediately. Social Security can be delayed, and required minimum distributions can still be years away.

That can create a window where your taxable income is lower than it was while you were working and potentially lower than it will be later in retirement. Instead of allowing some of those lower tax brackets to go unused, you can choose to recognize additional income through a Roth conversion.

That doesn’t mean you should automatically fill a particular tax bracket every year. It means retirement can give you an opportunity to decide whether paying some tax intentionally today can solve a longer-term problem.

Why Would You Voluntarily Pay 22% or 24% Tax Today?

This is where Roth conversion planning can become overly focused on calculations.

We often see people consider Roth conversions that intentionally recognize income in the 22% or 24% federal tax brackets. At first, voluntarily paying that much tax on money you don’t currently need can seem counterintuitive.

The reason to consider it is that leaving the money in the traditional retirement account doesn’t make the tax obligation disappear. You’re deciding whether the tax rate available today is acceptable compared with the taxes you or your family could eventually pay on that money.

You can also have decades of investment growth ahead. Moving assets into a Roth means that future growth can occur inside an account where qualified withdrawals are tax-free.

There’s uncertainty in that calculation. You don’t know exactly what tax rates will be decades from now, how investments will perform, or how your life will unfold.

That’s why the tax calculation should support the decision rather than become the reason for the decision.

Why Does Future Investment Growth Matter?

The potential benefit of a Roth conversion can become more meaningful when the converted assets have significant time to grow. If you convert money shortly after retirement and leave it invested for another 15 or 20 years, the account can look very different by the time you need it.

This can be especially relevant when Roth assets are positioned for long-term growth. The greater the future appreciation, the more future value can ultimately sit inside an account that can provide qualified tax-free distributions.

That doesn’t mean investing aggressively automatically makes a Roth conversion worthwhile. You still have to consider the tax paid today and what could have happened if the assets remained in the traditional account.

But if you’re going to intentionally pay tax to move money into a Roth, what happens to that money afterward matters.

How Can a Roth Conversion Give You More Flexibility?

You don’t know exactly what you’ll need money for 10, 15, or 20 years from now. You could want to help a child, buy a second home, renovate your house, take a major trip, or simply deal with an expense you couldn’t have anticipated when you retired.

If most of your retirement savings are in traditional IRAs and 401(k)s, accessing additional money can also mean recognizing additional taxable income. A financial decision can quickly become a tax decision.

Having meaningful Roth assets gives you another option. Assuming the applicable requirements are met, you can access Roth money without the withdrawal being included in taxable income.

In a sense, you’ve already made the tax decision. You paid the tax when you converted the money, which can give you more freedom over how and when you use those assets later.

That flexibility can be difficult to assign a dollar value to, but that doesn’t mean it has no value.

How Can Roth Conversions Help a Surviving Spouse?

Survivor planning can be one of the more compelling reasons a married couple considers Roth conversions.

While both spouses are alive, they can be filing jointly and taking advantage of the wider tax brackets available to married couples. After one spouse dies, the survivor can eventually be managing much of the same financial life under the tax brackets available to a single taxpayer.

The household’s expenses don’t necessarily fall proportionately either. There’s still a house to maintain, property taxes to pay, utilities, insurance, travel, healthcare, and the rest of everyday life.

Meanwhile, the surviving spouse can still own substantial retirement accounts and receive Social Security, pensions, investment income, and eventually required minimum distributions. That can leave the survivor paying taxes under a less favorable tax structure than the couple had while both spouses were alive.

If that possibility concerns you, it creates a real planning objective.

A couple can decide to intentionally pay some taxes while both spouses are alive so that less of the surviving spouse’s future wealth is tied up in tax-deferred retirement accounts. Roth conversions can gradually move some of those assets into a tax-free account before the surviving spouse has to manage the finances alone.

You’re not eliminating taxes. You’re choosing when and under what circumstances you’re willing to pay some of them.

For some couples, that can make the surviving spouse’s future financial life simpler and more flexible.

How Can Roth Conversions Help With Legacy Planning?

A similar issue can arise with your children.

Suppose you expect to leave a substantial traditional IRA to children who are successful in their careers. They could inherit the account during some of their highest-earning years.

Under current rules, many non-spouse beneficiaries must empty an inherited retirement account by the end of the applicable 10-year period. Distributions from inherited traditional retirement accounts can generally create taxable income for the beneficiary.

That can mean your children are taking taxable distributions from an inherited IRA on top of salaries, bonuses, investment income, and other earnings they already have.

You can look at that situation and decide you would rather pay some of the income tax yourself.

Roth conversions during your lifetime can accomplish that. Your children can still have to distribute an inherited Roth IRA under the applicable beneficiary rules, but qualified distributions can generally come out income-tax-free.

In other words, you paid the income tax rather than leaving the tax obligation attached to the retirement account for the next generation.

But this is only a benefit if it matters to you.

Some parents care deeply about the after-tax inheritance their children receive. Others would rather prioritize their own retirement and let their adult children deal with the taxes associated with whatever they eventually inherit.

Both can be reasonable positions. The important part is knowing which problem you actually want to solve.

Is Minimizing Taxes Really the Goal?

Tax-planning software can model different Roth conversion strategies and estimate which one produces the highest projected after-tax wealth decades from now. Those calculations can be useful because they help us understand the tradeoffs.

But maximizing a number on a projection isn’t necessarily a financial goal.

If a Roth conversion saves an estimated amount of lifetime taxes but doesn’t meaningfully improve anything you care about, the calculation alone might not be a compelling reason to write a large check to the IRS today.

Instead, think about the problems in your own life. Do you want more flexibility later in retirement? Are you concerned about what your spouse’s tax situation could look like after your death? Do you have children who could inherit retirement accounts during their peak earning years?

Once you identify the problem, you can determine whether a Roth conversion is a useful way to address it.

Start with the problem. Then use the tax planning to help solve it.

When Can a Roth Conversion Not Make Sense?

A lower-income year doesn’t automatically mean you should convert. A conversion increases taxable income in the year it occurs, and that additional income can have consequences beyond your federal income-tax bracket.

For people on Medicare, a conversion can potentially increase future Medicare Part B and Part D premiums through IRMAA. State income taxes can also affect the calculation, and someone expecting to be in a substantially lower tax situation later can have less reason to accelerate income today.

There’s also the simple reality that you have to pay the tax. Writing a large tax check today in exchange for a benefit that can occur decades from now shouldn’t be treated casually.

The amount converted deserves careful planning because you’re making an intentional decision to accelerate taxes.

What Should You Review Before Doing a Roth Conversion?

Before deciding how much to convert, start with what you’re trying to accomplish. Do you want more flexibility later in retirement? Are you concerned about the tax situation your spouse could face if you die first? Do you care about reducing the future tax burden associated with assets your children inherit?

From there, the decision needs to be modeled. You can compare different conversion amounts, the tax rates you would pay today, how long the converted assets can remain invested, and what can happen if the money stays in the traditional retirement account instead.

The analysis can also account for future Social Security income, required minimum distributions, Medicare premiums, investment growth, state taxes, and the potential change from married filing jointly to a single filing status after one spouse dies. For legacy planning, you can also compare the potential tax consequences of leaving traditional retirement assets versus Roth assets to your children.

These aren’t decisions you have to make based on guesswork. A financial plan can model different scenarios and show how the tradeoffs can affect you, your spouse, and your heirs over time.

If you’re considering a Roth conversion, CHJ Wealth Management can help model these scenarios and determine how different conversion strategies fit into your broader retirement plan.

Roth Conversion FAQ

Should I Do a Roth Conversion Immediately After I Retire?

Not automatically. Retirement can create lower-income years that make Roth conversions worth evaluating, but the decision depends on your current tax rate, future tax situation, investment horizon, Medicare considerations, and what you want the conversion to accomplish.

Do I Pay Taxes When I Convert a Traditional IRA to a Roth IRA?

Generally, the taxable portion of a traditional IRA converted to a Roth IRA is included in income for the year of the conversion.

Why Would I Pay Taxes on a Roth Conversion If I Don’t Need the Money?

You can decide that paying a known tax rate today is worthwhile in exchange for future tax-free growth, greater flexibility later in retirement, a potentially better tax situation for a surviving spouse, or more tax-efficient assets for your heirs.

Can a Roth Conversion Increase My Medicare Premiums?

Yes. A Roth conversion can increase modified adjusted gross income, which can affect income-related Medicare Part B and Part D premiums in a later year.

Do Roth IRAs Have Required Minimum Distributions?

Roth IRAs do not require minimum distributions during the original owner’s lifetime under current federal rules. Beneficiaries can be subject to distribution requirements after the owner’s death.

Can Roth Conversions Help My Children When They Inherit My IRA?

Yes, they can. Many non-spouse beneficiaries must distribute inherited retirement accounts within a specified period. Traditional retirement-account distributions are generally taxable, while qualified inherited Roth IRA distributions can generally be received income-tax-free.

Questions to Ask Before Doing a Roth Conversion

Before making the decision, it can help to ask:

• Is this a lower-income period for me?
• What tax rate am I willing to pay today?
• How long can these assets remain invested?
• What problem am I trying to solve?
• Would having more Roth assets give me meaningful flexibility later?
• Am I concerned about the tax situation my spouse could face if I die first?
• Do I care about reducing the future tax burden associated with assets my children inherit?
• Can the conversion affect my Medicare premiums or other parts of my financial plan?

Those questions give the tax analysis a purpose. From there, you can model whether a conversion actually moves you closer to the outcome you want.

Final Thoughts

Retirement often creates a tax-planning opportunity that wasn’t available while you were earning a paycheck. A Roth conversion can allow you to use those lower-income years to move money from a tax-deferred account into a tax-free account.

But the goal isn’t to convert as much as possible or produce the lowest theoretical lifetime tax bill. The goal is to use tax planning to solve something that matters to you.

Maybe that means having more flexibility over your own money later in retirement. Maybe it means reducing the potential tax pressure on your spouse after you’re gone. Or maybe it means leaving your children assets with fewer future tax consequences.

Once you know what you’re trying to accomplish, you can model the options and decide whether paying taxes today through a Roth conversion is worth it.

Tax planning is the tool. The life you’re planning for is the reason to use it.

Disclosure

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; however, no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative purposes only.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.

Tax laws, tax brackets, retirement account rules, Medicare premiums, income thresholds, and inherited retirement account rules can change over time. Before making Roth conversion or retirement tax-planning decisions, it is important to verify current rules with the IRS, Medicare, Social Security, or a qualified professional.