Most Roth conversion advice skips the underwriting. Here is the framework that actually decides whether converting makes sense.
By Courtney Hoffman, CFP®, AAMS™ EverPar Advisors
Roth conversions get a lot of attention online, at seminars, and in conversations with friends, and the message is almost always the same: convert, convert, convert. The tax benefits and the reduced RMDs get plenty of airtime, but the situations where a conversion does not make sense get much less. This post walks through the four questions EverPar actually uses with clients to decide whether a conversion helps or just adds complexity.
Why “Convert, Convert, Convert” Isn’t the Whole Story
A Roth conversion is a trade-off. Taxes get paid now to avoid a potentially larger tax bill later. Viewed through the lens of tax rates alone, the decision comes down to one comparison: today’s tax rate versus the tax rate in retirement. If that future rate ends up the same or lower, the conversion adds complexity without improving the result. The hard part is estimating that future rate, and people get it wrong in both directions.
Question 1: Will Your Tax Rate Be Higher in Retirement?
People often underestimate their future tax bracket because they assume no paycheck means a lower bracket. Three things commonly break that assumption.
- Required minimum distributions add to Social Security income, and the more other income there is, the more of that Social Security benefit becomes taxable, up to 85 percent.
- A surviving spouse’s filing status changes to single, which roughly cuts the bracket width in half while the required distributions stay the same.
- And the future tax bracket can simply end up higher than expected.
Consider a married couple, both 61, with about $1.5 million in pre-tax retirement accounts averaging a 6 percent annual return. By age 75, that account could approach $3.4 million, right when required distributions begin. The first RMD alone could be around $137,000, which combined with Social Security can easily push a couple into a higher marginal bracket than they pictured for retirement.
On the other side, people also overstate their future tax bracket. Retirement spending often falls after the first several years as travel and one-time projects taper off, which lowers the effective tax rate.
Dollars earmarked for charity, through qualified charitable distributions or as an IRA beneficiary, transfer at a zero percent rate, so there is no future tax bill to avoid on that portion. And a move to a state without income tax changes the math significantly if a conversion already covered the state tax bill before the move.
Question 2: Can You Pay the Tax From Outside the IRA?
This question is a quick disqualifier, and it only takes an account statement to check. When the tax liability is paid from a taxable account, such as savings, a brokerage account, or a matured CD, 100 percent of the converted balance lands in the Roth and compounds tax free.
On a $100,000 conversion in the 24 percent marginal bracket, that means the full amount grows tax free, and the $24,000 used to pay the tax also moves out of an account that would have kept generating taxable dividends, interest, or capital gains.
When the tax is paid from the IRA itself, the math changes. On that same $100,000 conversion, the $24,000 withheld goes straight to the IRS and never crosses into the Roth, so only $76,000 actually converts, while the full $100,000 is still taxed. For anyone under 59½, that withheld amount is also treated as an early distribution and carries a 10 percent penalty on top of the income tax owed.
This is not an all or nothing decision. A conversion can be sized to whatever tax bill can comfortably be paid from outside funds, and “outside the IRA” can include additional withholding from a paycheck or a pension, not just a brokerage or savings account.
Question 3: What Disqualifies You This Year?
A few constraints can make this year a bad year for a conversion, even when the long-term math looks fine. Before age 65, the ACA subsidy cliff matters, since a conversion competes directly with health insurance subsidies.¹ For anyone approaching 65, there is a two year lookback that affects Medicare premiums through IRMAA.²
Many people sit in the 0 percent capital gains bracket, and a conversion can push otherwise untaxed gains into the 15 percent bracket without that cost showing up anywhere obvious. The net investment income tax threshold, at $250,000 of modified adjusted gross income, is also worth watching, since a conversion is not net investment income itself but can raise MAGI enough to drag other income over that line. And the newer senior bonus deduction, worth $6,000 per person over 65 through 2028, phases out between $150,000 and $250,000 of income, so converted dollars inside that band can erode the deduction.
Everything from “Many people sit in the 0 percent…” onward is unchanged from your original draft. Only the first two sentences were split and given footnote markers.
Question 4: Who Inherits, and at What Rate?
Every dollar not spent eventually gets inherited by someone, and that person pays tax on it at their rate, not the original owner’s.
Three groups tend to point in different directions.
- A surviving spouse filing single sees roughly half the bracket width of a joint return, even though the required distributions and portfolio stay the same, which makes converting during joint years a way to buy that survivor some room.
- Children in their peak earning years face a 10 year distribution window on an inherited IRA, so converting at a lower current rate can spare them a much higher one later, while children who earn less than their parents may be better served by converting less, since the parents’ rate could exceed what the children would ever pay.
- Charity is the clearest case: IRA dollars left to charity transfer at a zero percent rate, so those dollars should be the last ones considered for conversion.
A Quick Green Light, Red Light Check
Good candidates for a conversion typically include a gap year couple living off outside money in a low bracket, a lopsided balance sheet weighted heavily toward pre-tax accounts, a couple with a large age gap or health difference, heirs who out earn the account owner, or a temporary low income year from a gap year, business loss, or large deduction.
Weaker candidates usually include anyone with no money outside the IRA to cover the tax, an IRA already earmarked for charity, heirs in a lower bracket than the account owner, an upcoming move to a state with no income tax, reliance on an ACA subsidy before 65, or a need for the converted funds within five years.
Get Your Own Numbers Modeled
These examples are meant to be educational, not a substitute for an individualized plan. Anyone curious what their own required distributions, survivor bracket, or conversion math actually look like can schedule an introductory foundation session at https://everpar.com/connect/ to have it modeled directly.
Sources
Internal Revenue Service, “How Your Income Affects Your Premium Tax Credit,” irs.gov.
Social Security Administration, “Medicare Premiums: Rules for Higher-Income Beneficiaries,” ssa.gov.
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