Not all at once, probably over the course of 5 years to minimize the tax hit. As a newbie….how common is it? Who has done it? are you happy you did? What was the tax hit like?
This is a generic question. Everyone's tax situation, age, tax rates, etc are different. If it makes sense based on your age and tax bracket then do it. You should be consulting a tax professional if you need guidance.
Right answer. You can kind of rule of thumb this: If you have under 1M in IRA, probably not worth it unless you have a lot of other retirement income sources or you can do it at 12% bracket. Over 2M, probably very worth it up to at least 22% and possibly 24% brackets. Now, the art is in figuring out where that sweet spot is. An advisor can help, or some time spent with retirement planning software (I've use right capital and Boldin, getting similar strategies).
There are many opinions on benefit of conversions vs cost of conversions. There are also a large number of factors, too many to put in a post, more likely a book!
My take is the answer to a few questions. If you project out your IRA balances to your RMD age, will the balance be over $1M? Do you want to leave heirs a taxable inheritance that whey will have to deal with for the 10 years after you die? What will your RMDs be and will they push you into high IRMAA brackets? What will those tax and IRMAA figures look life when the you plural turns into a you filing single? Do you have the cash to pay the taxes on the conversion or will you be paying that from your IRA?
Keep in mind that if the goal is to eliminate or greatly reduce the IRA balance, you will need to convert at a rate that exceeds the growth of the IRA balance. Lower tax brackets end pretty low if you are converting meaningful amounts in a large IRA.
How common is it? No idea. My guess is fairly common. My guess is that many of the conversions are not beneficial to those who did them. I did a big chunk this year. Am trying to figure out how much I want to do next year. Not an easy math problem especially since some of the factors are unpredictable and some are personal and not necessarily numeric.
Edit
One more question? Is an inheritance tax involved? If so, reducing your balances by paying taxes during a Roth conversion may reduce the basis of the inheritance tax.
We are retired and in the 0% tax bracket. We are filling up the 12% bracket by doing Roth conversions.
We will be in this very low bracket until RMD'S in 6 years.
I have no need for the money. I am just in a weird tax situation for the next 6 years. When we get to RMD age we will probably be in the 24% tax bracket if we don't do conversions and the market does well.
The other problem is going to be my mother's IRA that I will probably inherit. It's a tax bomb just waiting to happen
I am cashing out one fixed annuity every year for her. Most have $50- 60,000 in tax deferred earnings.
She is in assisted living and everything that her LTC insurance doesn't cover is a medical expense tax deduction. Tax year 2026 is her last annuity.
Starting in 2027 I will work on her IRA'S. She is 91 years old, so it depends on how long she lives
You want to keep as much money in Roth as possible so as to take advantage of the tax free growth. So when you retire a good strategy is to convert traditional to Roth while spending down taxable. Whether you withdraw and spend or convert to Roth, the tax is the same. The question is would you rather be left with more in taxable or more in Roth. I would take more in Roth.
To build on this question, is there a calculator to assist? General guidelines?
I feel like my pretax retirement account is going to end up being a tax bomb (already has almost 10 years of annual spend in it) and I won’t be 59.5 for another 12 years.
its as simple as figuring out how tax brackets work and then figuring out how much money you need to convert, on top of your Social Security, pension, Roth IRA, brokerage etc.
Yes, I understand the mechanics, but it certainly is not simple. There are many variables and assumptions that dramatically tilt the break even points to hit tax efficiency vs max gains.
In my scenario I would like to be shooting for 24% bracket during RMD, but in my situation dividends + cap gains on draw downs in post tax + SS will consume almost all of the 24% bracket assuming average annual returns for the next 27 years (my rmd age). Using this line of thinking, I should probably convert almost all of my pretax early.
Once the pretax gets too large, it compounds at a rate greater than what’s left to “fill the 24% bracket” and you are assured a higher bracket either now or at RMD. When this happens, how do you balance a few years of early write downs at 32% or 35% vs doing nothing and let it just run into max tax rates and keep compounding on the deferred tax?
Additional variables would be life expectancy of myself and spouse, once one of us dies, the 24% brackets shrink dramatically but the RMDs do not.
Finally, in this instance, I do think doing larger conversions in a down market is a valid form of market timing.
I stand corrected - you obviously understand the basics extremely well, but also - you can see why this is a job for CPA and no simple online calculator can handle these issues, too many complex variables.
My own guiding principles would be - if you are confident that you will at some point get into 32% or 35% bracket, due to RMDs and/or compounding, (congrats, a good problem to have!) you should certainly start conversions early - maybe now - and fill up that 24% bracket to the brim!
Also, effective LTCG increases as your gains grow, so I plan to liquidate my own brokerage more aggressively for those reasons.
You can't plan for everything - how markets behave and when one of you dies is outside your control, but I would imagine a good CPA can game-plan some basic scenarios.
When you're actually pending retirement and figuring out how to plan your finances, that might be the year to pay for a subscription to a retirement planning app like BoldIn. It will calculate optimal strategies for you in terms of Roth conversions and IRMAA and all of the other pitfalls under multiple different scenarios.
It's certainly something you *can* try to spreadsheet out yourself, but as I have to remind myself, my time is not worth $0.
Converting over five years is like prepaying for an all-you-can-eat buffet today because you’re certain the restaurant will double its prices by the time you’re actually hungry. It’s the ultimate "tax-insurance" move for people who’d rather take a controlled sting from the IRS now than face a full-blown financial amputation in retirement.
Stay liquid, because the tax man doesn't accept "I'll pay you later" in a Roth world.
I did it specifically to rebalance my Trad and Roth IRAs to 50/50. You should manage the amount you convert relative to your tax bracket. And stop converting before the year you turn 63, since 63 and 64 are your Medicare IRMAA look back years.
You didn't give your age or other details. Let's pretend you get taxed at the 22% bracket + 8% State on your conversion. You'll need enough time for there to be 43% growth/earnings to bring you to even. So, maybe 7 to 10 years before you'll begin to benefit. And as noted, the ordering rules for Roth IRA distributions means each round of converted funds carries its own 5 year holding period.
Kind of - if paying the tax outside of the IRA funds, then as long as the marginal tax rate in the year you convert is no higher than in the year you withdraw, it is break even immediately. You may have to have a Roth (of some sort) for 5 years before you can withdraw from it - requirements vary by age.
There's a whole industry out there trying to scare you about RMD "tax bombs" and trying to get you to buy their services to solve the problem. The truth is, for most of us, RMDs won't hit until we are 75 and unless you have a very large IRA, they won't be a huge deal. Sure, there is some optimization you can do but it involves predicting what your account balances will be years in the future and where tax rates will go - and we all know how difficult that is. If you want to do some modest conversions to fill up your current tax bracket, that's fine, but converting your entire traditional IRA to a Roth, especially if it's large, is generally a bad idea.
I did it. I did a lot of thinking about it first. I hired a consultant to run the numbers for me, and then I did a lot of modeling on my own.
The conclusion from my research is that it is a highly individual decision. In my case, in retirement I would have savings and Social Security but no pension. Tax avoidance would be key to getting the most from my savings in retirement, and this was best accomplished by having a variety of sources to draw from. The strategy was to keep AGI/MAGI low enough to get the 0% capital gains tax rate (and also to avoid things like increases in Medicare rates, etc.). SS is what it is; RMDs from IRAs and 401(k)s are a function of how much money is in those kinds of accounts. The rest of the income has to come from cap gains in taxable accounts, and finally Roth withdrawals.
What I did was figure out what I wanted my net income to be, based on a budget estimate. Then I figured out how much SS, ordinary income, interest, and dividends I could take while maintaining an advantageous tax rate. Then take as much cap gains as I could (same proviso). The remaining gap, if any, could only be filled by tax-free money, and that means Roth.
After all this modeling, I determined that I had too much in 401(k) and not enough in Roth. So I converted until they were more balanced. The details of conversion strategy are much-discussed and again, highly individual, so I won't detail them here.
I retired at 35 and I've been doing Roth conversions for the past several years (now 43). I'm happy paying 0% (standard deduction), 10%, and 12% taxes on my conversions. I also moved to a state with no income tax after I retired, so a bonus savings there as well.
If I did no conversions, I would most likely be in the 35%+ tax brackets by the time I hit RMD age. Thanks to Roth conversions over four decades, I'll probably be in the 12-22% brackets.
Also, there's a weird balance of Roth conversions vs tax gain harvesting to figure out. Do I do Roth conversions at 12%, or do I step up the cost basis in my taxable account at 0%? Oh the joys of tax optimization.
I just did it a couple of days of days ago. My 'Transaction History' looks ALL SCREWED-UP. According to what they posted in my account, they failed to withhold any Federal Taxes, and over withheld State by thousands of dollars. I had even called seeking assistance. And their Rep claimed to have experience in that area. But she was no help whatsover. The forms were somewhat confusing, but the form W-4R that I filed with them was totally correct. Hopefully, I can get this straightened out, tomorrow. But their standoffish policy of not allowing an email thread to be created is VERY discouraging.
You don't want withholding on conversions. That's considered a distribution and if you're under 59 1/2, there's an additional 10% penalty. You typically do conversions knowing how it impacts your taxes and are prepared to pay from available funds.
According to what they posted in my account, they failed to withhold any Federal Taxes
Right, because federal taxes are determined by the Pro Rata Rule, which means all your Traditional IRA's values are important for the calculation. You may have additional IRA's at another institution and your brokerage would not be able to know that, and they would not be able to calculate the tax bill correctly.
Additionally, if you have them do the withholding, you're paying taxes out of your tax-advantaged money... you really want to pay those taxes out of non-sheltered money.
Don't do withholding on a conversion. Do the tax calculations yourself and pay the estimated taxes manually.
Assuming all of your Trad IRA money (in all accounts, not just the one you're converting funds from) is pre-tax, the tax hit is identical to just having that amount more ordinary income.
You need to determine your current tax bracket and estimate your future tax bracket.
Are you currently married and may be in a larger tax bracket (one death) in the future?
Will your inheritors be in a larger tax bracket - 10 year inherited IRA distribution?
Do you have cash to pay the current taxes?
There are more variables to decide - but what do you feel comfortable with - you could move it all now, and never gain (personally) from the benefits - but your heirs will certainly thank you for not moving them into a higher tax bracket (a good problem to have).
Really depends - most people should do this in their 20s if they have the $ to do it. If you have multi-million IRA/401, this can be well worth doing while working if you can stay in the 24% bracket.
I'm about to start doing this with mine, over the next 3 years.
I did the math, and with 20 years left to go, I stand to gain over $70,000 doing it now. The younger you are the better the benefits get.
Fidelity has a Roth IRA calculator that can help you decide. Or you can make your own using Excel to fine-tune all the variables, but the Fidelity one gives you a rough ballpark that will give you an idea if it's even reasonable in the first place.
For myself, I've been doing "tax diversification" and putting about 33% of my 401k into Roth, which amounts to about $3k of taxes a year. I did the math and figured out that if I drop my 401k Roth contributions to 0, I can move $27k of the Trad IRA into Roth for $3k taxes, but only $7000 of the 401k into Roth. So it's a no-brainer for me. I get to put 3.5x more money into Roth next year for the same tax burden.
But if you weren't putting anything into 401k Roth then the math might be different for you.
I've done two conversions post retirement, pre SS/Medicare. Doing it is very dependent on your personal portfolio structure, size and tax situation. I won't know for certain it's the "right" decision until I get to RMD age. It's a calculated move based on current known information and assumptions about tax rates in the future.
Jumping onto this thread. I just signed up for Boldin to use their calculator for this exact question. Curious if others have tried it and their experience.
This is a generic question. Everyone's tax situation, age, tax rates, etc are different. If it makes sense based on your age and tax bracket then do it. You should be consulting a tax professional if you need guidance.
This is the correct answer.
You need to play with the Roth Converstion ladder calcs with current tax rate vs estimated tax rates in the future and at RMDs
Right answer. You can kind of rule of thumb this: If you have under 1M in IRA, probably not worth it unless you have a lot of other retirement income sources or you can do it at 12% bracket. Over 2M, probably very worth it up to at least 22% and possibly 24% brackets. Now, the art is in figuring out where that sweet spot is. An advisor can help, or some time spent with retirement planning software (I've use right capital and Boldin, getting similar strategies).
It’s a common strategy for early retirees to access conversions after 5 years. I’ve done it twice now to fill up my 12% tax bracket.
There are many opinions on benefit of conversions vs cost of conversions. There are also a large number of factors, too many to put in a post, more likely a book!
My take is the answer to a few questions. If you project out your IRA balances to your RMD age, will the balance be over $1M? Do you want to leave heirs a taxable inheritance that whey will have to deal with for the 10 years after you die? What will your RMDs be and will they push you into high IRMAA brackets? What will those tax and IRMAA figures look life when the you plural turns into a you filing single? Do you have the cash to pay the taxes on the conversion or will you be paying that from your IRA?
Keep in mind that if the goal is to eliminate or greatly reduce the IRA balance, you will need to convert at a rate that exceeds the growth of the IRA balance. Lower tax brackets end pretty low if you are converting meaningful amounts in a large IRA.
How common is it? No idea. My guess is fairly common. My guess is that many of the conversions are not beneficial to those who did them. I did a big chunk this year. Am trying to figure out how much I want to do next year. Not an easy math problem especially since some of the factors are unpredictable and some are personal and not necessarily numeric.
Edit
One more question? Is an inheritance tax involved? If so, reducing your balances by paying taxes during a Roth conversion may reduce the basis of the inheritance tax.
Good general advice: when it comes to your finances, if you don't thoroughly understand what you're doing, you probably shouldn't do it.
100 PERCENT GOOD ADVICE.
We are retired and in the 0% tax bracket. We are filling up the 12% bracket by doing Roth conversions. We will be in this very low bracket until RMD'S in 6 years.
My question about this approach is why not just start withdrawing from both traditional and Roth now? Why wait til rmds for the former?
I have no need for the money. I am just in a weird tax situation for the next 6 years. When we get to RMD age we will probably be in the 24% tax bracket if we don't do conversions and the market does well. The other problem is going to be my mother's IRA that I will probably inherit. It's a tax bomb just waiting to happen
and it could be worthwhile for you to pay your mother's taxes for her to convert her IRA to Roth if it could be done at 12%
I am cashing out one fixed annuity every year for her. Most have $50- 60,000 in tax deferred earnings. She is in assisted living and everything that her LTC insurance doesn't cover is a medical expense tax deduction. Tax year 2026 is her last annuity. Starting in 2027 I will work on her IRA'S. She is 91 years old, so it depends on how long she lives
You want to keep as much money in Roth as possible so as to take advantage of the tax free growth. So when you retire a good strategy is to convert traditional to Roth while spending down taxable. Whether you withdraw and spend or convert to Roth, the tax is the same. The question is would you rather be left with more in taxable or more in Roth. I would take more in Roth.
To build on this question, is there a calculator to assist? General guidelines?
I feel like my pretax retirement account is going to end up being a tax bomb (already has almost 10 years of annual spend in it) and I won’t be 59.5 for another 12 years.
its as simple as figuring out how tax brackets work and then figuring out how much money you need to convert, on top of your Social Security, pension, Roth IRA, brokerage etc.
Yes, I understand the mechanics, but it certainly is not simple. There are many variables and assumptions that dramatically tilt the break even points to hit tax efficiency vs max gains.
In my scenario I would like to be shooting for 24% bracket during RMD, but in my situation dividends + cap gains on draw downs in post tax + SS will consume almost all of the 24% bracket assuming average annual returns for the next 27 years (my rmd age). Using this line of thinking, I should probably convert almost all of my pretax early.
Once the pretax gets too large, it compounds at a rate greater than what’s left to “fill the 24% bracket” and you are assured a higher bracket either now or at RMD. When this happens, how do you balance a few years of early write downs at 32% or 35% vs doing nothing and let it just run into max tax rates and keep compounding on the deferred tax?
Additional variables would be life expectancy of myself and spouse, once one of us dies, the 24% brackets shrink dramatically but the RMDs do not.
Finally, in this instance, I do think doing larger conversions in a down market is a valid form of market timing.
I stand corrected - you obviously understand the basics extremely well, but also - you can see why this is a job for CPA and no simple online calculator can handle these issues, too many complex variables.
My own guiding principles would be - if you are confident that you will at some point get into 32% or 35% bracket, due to RMDs and/or compounding, (congrats, a good problem to have!) you should certainly start conversions early - maybe now - and fill up that 24% bracket to the brim!
Also, effective LTCG increases as your gains grow, so I plan to liquidate my own brokerage more aggressively for those reasons.
You can't plan for everything - how markets behave and when one of you dies is outside your control, but I would imagine a good CPA can game-plan some basic scenarios.
When you're actually pending retirement and figuring out how to plan your finances, that might be the year to pay for a subscription to a retirement planning app like BoldIn. It will calculate optimal strategies for you in terms of Roth conversions and IRMAA and all of the other pitfalls under multiple different scenarios.
It's certainly something you *can* try to spreadsheet out yourself, but as I have to remind myself, my time is not worth $0.
Converting over five years is like prepaying for an all-you-can-eat buffet today because you’re certain the restaurant will double its prices by the time you’re actually hungry. It’s the ultimate "tax-insurance" move for people who’d rather take a controlled sting from the IRS now than face a full-blown financial amputation in retirement.
Stay liquid, because the tax man doesn't accept "I'll pay you later" in a Roth world.
I did it specifically to rebalance my Trad and Roth IRAs to 50/50. You should manage the amount you convert relative to your tax bracket. And stop converting before the year you turn 63, since 63 and 64 are your Medicare IRMAA look back years.
You didn't give your age or other details. Let's pretend you get taxed at the 22% bracket + 8% State on your conversion. You'll need enough time for there to be 43% growth/earnings to bring you to even. So, maybe 7 to 10 years before you'll begin to benefit. And as noted, the ordering rules for Roth IRA distributions means each round of converted funds carries its own 5 year holding period.
Kind of - if paying the tax outside of the IRA funds, then as long as the marginal tax rate in the year you convert is no higher than in the year you withdraw, it is break even immediately. You may have to have a Roth (of some sort) for 5 years before you can withdraw from it - requirements vary by age.
There's a whole industry out there trying to scare you about RMD "tax bombs" and trying to get you to buy their services to solve the problem. The truth is, for most of us, RMDs won't hit until we are 75 and unless you have a very large IRA, they won't be a huge deal. Sure, there is some optimization you can do but it involves predicting what your account balances will be years in the future and where tax rates will go - and we all know how difficult that is. If you want to do some modest conversions to fill up your current tax bracket, that's fine, but converting your entire traditional IRA to a Roth, especially if it's large, is generally a bad idea.
I did it. I did a lot of thinking about it first. I hired a consultant to run the numbers for me, and then I did a lot of modeling on my own.
The conclusion from my research is that it is a highly individual decision. In my case, in retirement I would have savings and Social Security but no pension. Tax avoidance would be key to getting the most from my savings in retirement, and this was best accomplished by having a variety of sources to draw from. The strategy was to keep AGI/MAGI low enough to get the 0% capital gains tax rate (and also to avoid things like increases in Medicare rates, etc.). SS is what it is; RMDs from IRAs and 401(k)s are a function of how much money is in those kinds of accounts. The rest of the income has to come from cap gains in taxable accounts, and finally Roth withdrawals.
What I did was figure out what I wanted my net income to be, based on a budget estimate. Then I figured out how much SS, ordinary income, interest, and dividends I could take while maintaining an advantageous tax rate. Then take as much cap gains as I could (same proviso). The remaining gap, if any, could only be filled by tax-free money, and that means Roth.
After all this modeling, I determined that I had too much in 401(k) and not enough in Roth. So I converted until they were more balanced. The details of conversion strategy are much-discussed and again, highly individual, so I won't detail them here.
I retired at 35 and I've been doing Roth conversions for the past several years (now 43). I'm happy paying 0% (standard deduction), 10%, and 12% taxes on my conversions. I also moved to a state with no income tax after I retired, so a bonus savings there as well.
If I did no conversions, I would most likely be in the 35%+ tax brackets by the time I hit RMD age. Thanks to Roth conversions over four decades, I'll probably be in the 12-22% brackets.
Also, there's a weird balance of Roth conversions vs tax gain harvesting to figure out. Do I do Roth conversions at 12%, or do I step up the cost basis in my taxable account at 0%? Oh the joys of tax optimization.
I just did it a couple of days of days ago. My 'Transaction History' looks ALL SCREWED-UP. According to what they posted in my account, they failed to withhold any Federal Taxes, and over withheld State by thousands of dollars. I had even called seeking assistance. And their Rep claimed to have experience in that area. But she was no help whatsover. The forms were somewhat confusing, but the form W-4R that I filed with them was totally correct. Hopefully, I can get this straightened out, tomorrow. But their standoffish policy of not allowing an email thread to be created is VERY discouraging.
You don't want withholding on conversions. That's considered a distribution and if you're under 59 1/2, there's an additional 10% penalty. You typically do conversions knowing how it impacts your taxes and are prepared to pay from available funds.
Right, because federal taxes are determined by the Pro Rata Rule, which means all your Traditional IRA's values are important for the calculation. You may have additional IRA's at another institution and your brokerage would not be able to know that, and they would not be able to calculate the tax bill correctly.
Additionally, if you have them do the withholding, you're paying taxes out of your tax-advantaged money... you really want to pay those taxes out of non-sheltered money.
Don't do withholding on a conversion. Do the tax calculations yourself and pay the estimated taxes manually.
Assuming all of your Trad IRA money (in all accounts, not just the one you're converting funds from) is pre-tax, the tax hit is identical to just having that amount more ordinary income.
IT is not for everybody - but IS for many.
You need to determine your current tax bracket and estimate your future tax bracket.
Are you currently married and may be in a larger tax bracket (one death) in the future?
Will your inheritors be in a larger tax bracket - 10 year inherited IRA distribution?
Do you have cash to pay the current taxes?
There are more variables to decide - but what do you feel comfortable with - you could move it all now, and never gain (personally) from the benefits - but your heirs will certainly thank you for not moving them into a higher tax bracket (a good problem to have).
Are you retired? This is generally a bad idea until retirement since you will have lower taxable income then.
Really depends - most people should do this in their 20s if they have the $ to do it. If you have multi-million IRA/401, this can be well worth doing while working if you can stay in the 24% bracket.
Hence "generally"
My wife and I converted our traditional to Roth this year because we got raised taking us from the 22% tax bracket to the 35% tax bracket.
I'm about to start doing this with mine, over the next 3 years.
I did the math, and with 20 years left to go, I stand to gain over $70,000 doing it now. The younger you are the better the benefits get.
Fidelity has a Roth IRA calculator that can help you decide. Or you can make your own using Excel to fine-tune all the variables, but the Fidelity one gives you a rough ballpark that will give you an idea if it's even reasonable in the first place.
For myself, I've been doing "tax diversification" and putting about 33% of my 401k into Roth, which amounts to about $3k of taxes a year. I did the math and figured out that if I drop my 401k Roth contributions to 0, I can move $27k of the Trad IRA into Roth for $3k taxes, but only $7000 of the 401k into Roth. So it's a no-brainer for me. I get to put 3.5x more money into Roth next year for the same tax burden.
But if you weren't putting anything into 401k Roth then the math might be different for you.
I've done two conversions post retirement, pre SS/Medicare. Doing it is very dependent on your personal portfolio structure, size and tax situation. I won't know for certain it's the "right" decision until I get to RMD age. It's a calculated move based on current known information and assumptions about tax rates in the future.
Jumping onto this thread. I just signed up for Boldin to use their calculator for this exact question. Curious if others have tried it and their experience.