Roth Conversions Play Key Role in Defusing a Retirement Tax Bomb – Kiplinger’s Personal Finance

Editor’s note: This is the final part of a seven-part series. It dives more deeply into the third strategy for defusing a retirement tax bomb, which is Roth conversions. If you missed the introductory article, you may find it helpful to start here.

Because they offer tax-free qualified withdrawals, Roth IRAs and Roth conversions can be a critical strategy for defusing the retirement tax bomb that traditional IRAs, 401(k)s and other pre-tax savings accounts can set you up for in retirement.

A Roth conversion is when you transfer money out of a pre-tax retirement account into an after-tax Roth. Typically, every dollar you convert is taxed as ordinary income, unless the pre-tax account was also funded with after-tax dollars. 

Here’s the problem though: Most people who are facing a retirement tax bomb and are still working probably have high incomes and are in a high marginal tax bracket. The last thing they want is a Roth conversion, which adds to their income and would be taxed at high tax rates.

Instead, this is a good strategy to consider in low-income years, especially for people who retire early in their 50s and early 60s who may have several years to do conversions before Medicare means testing surcharges, Social Security income and RMDs kick in. Many of my clients do several years of annual Roth conversions starting early in retirement. 

Three Windows for Roth Conversions

The first window for Roth conversions is the years before enrolling in Medicare, but recall that Medicare means testing has a two-year look-back so your income at age 63 determines your Medicare Part B and Part D premiums when you’re 65. A prime window for Roth conversions is between retirement and age 62. If you do end up triggering Medicare means testing for a year or two while you do Roth conversions, you may find it’s still worthwhile. And you may be able to appeal Medicare means testing surcharges through IRS form SSA-44. 

The second window for Roth conversions is between retirement and when you start taking Social Security or pension income, at which point your income may be significantly higher and you may want to do smaller Roth conversions. This is an additional argument for deferring Social Security benefits for several years.

The final window lasts until required minimum distributions (RMDs) begin at age 72.  If you’re still sitting on a retirement tax bomb at that point, the conversion window has probably closed. 

Carefully Examine Your Tax Bracket

There are a few other concepts to keep in mind with Roth conversions. One is trying to “fill up” lower marginal tax brackets until you reach …….


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