Should I Do Roth Conversions After I Retire but Before RMDs Begin?

A low tax bill in your first few years of retirement feels like a victory. Your paycheck has stopped, and you might be living partly on savings while waiting to start Social Security. For the first time in years, your taxable income looks surprisingly small.

Enjoy that breathing room. Before you decide to keep your tax bill as low as possible every year, though, take a look down the road. Those low-tax years can give you a rare window to reduce what you pay the IRS over the rest of your retirement, which is why Roth conversions deserve a closer look.

Why the Years After Retirement Matter

Retirement income rarely stays the same from beginning to end. Early on, you usually have a lot of control over where your spending money comes from. Later in retirement, Social Security, pensions, and required minimum distributions (RMDs) create taxable income whether you need all of that money to live on or not.

Under current law, RMDs begin at age 73 for people born between 1951 and 1959, and at age 75 for those born in 1960 or later. If you retire at 62 and your RMDs do not start until 73 or 75, you have more than a decade of planning flexibility. Several of those years could offer lower tax rates than you faced while working or might face later on. The goal is to use those years on purpose rather than letting them pass by on autopilot.

What You Are Actually Doing With a Roth Conversion

Think of your pretax IRA as an account with a tax bill attached. You got a tax break when you put the money in, and eventually the IRS expects its share.

A Roth conversion lets you pay the tax on a portion of that account now. You move money from a traditional IRA into a Roth IRA, and the pretax amount you convert counts as ordinary taxable income for that year. In exchange, future qualified withdrawals come out tax-free, provided you are at least 59 1/2 and meet the five-year rule. Roth IRAs also have no required minimum distributions during the original owner's lifetime.

Having a tax-free account gives you much more flexibility later on. A car replacement, a new roof, or a family trip can be paid for with qualified Roth withdrawals without driving up your taxable income for the year. Still, getting that future flexibility comes with a cost today.

Does Paying the Tax Now Make Sense?

Imagine a married couple who retires at 63 with $1.2 million in traditional IRAs and cash savings available to help cover their living expenses. After projecting their retirement income and deductions, they see room to convert $40,000 this year inside the 22% federal tax bracket. That creates an $8,800 federal tax bill before state taxes.

Nobody gets excited about writing that check to the IRS.

If those same dollars would otherwise get pushed into the 24% bracket later on, however, paying 22% now is a worthwhile trade. On the other hand, if they would normally pull that money out in the 12% bracket down the road, converting now would leave the couple worse off. A conversion only makes sense when the long-term tax savings clearly beat the upfront cost.

You also want to think about your spouse. If one spouse passes away, the survivor will eventually file as a single taxpayer and often face higher tax rates even with less household income. That is why a good comparison always looks beyond this year's tax return.

Three Things to Check Before You Convert

1. How it affects your healthcare costs.Extra taxable income can trigger higher Medicare Part B and Part D premiums. Medicare looks at your tax return from two years earlier, so a conversion at age 63 can raise your premiums at 65. If you retire before Medicare starts and buy coverage through the ACA Marketplace, conversion income can also shrink or eliminate your health insurance tax credit. Make sure you factor those healthcare costs into the math.

2. Where the tax payment will come from.Paying the tax bill with money held outside your IRA leaves more dollars growing inside the Roth. Even so, draining your cash reserves just to pay taxes on a conversion can create a different problem. You still need comfortable cash reserves for everyday spending and unexpected expenses.

3. Whether converting fits your broader plans.You might expect to stay in a lower tax bracket later on, or you might need to spend the money soon. Or you may plan to leave part of your IRA to charity, where converting first would mean paying taxes on money the charity could have received tax-free. Sometimes the right conversion amount is smaller than you expected, and sometimes the right number is zero.

Make It an Annual Decision

You do not have to convert your entire IRA at once, and you do not have to convert the same amount every year. Start with a multi-year retirement income projection that compares leaving the money in your traditional IRA versus converting pieces over time. Include taxes, healthcare costs, spending needs, and what happens if one spouse outlives the other, then review the numbers each year as life changes.

At Martin Wealth Solutions, these are the exact conversations we walk through with clients so taxes do not turn into an expensive surprise later in retirement. If you are sitting between your final paycheck and your first RMD, take a closer look at these gap years and see whether putting this window to work makes sense for your plan.

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This article is for educational purposes only and is not individualized investment, tax, or legal advice. Roth conversions can increase taxable income, affect Medicare premiums and health insurance subsidies, and may not be appropriate for everyone. Tax-free Roth IRA withdrawals require certain conditions to be met. Tax laws may change, and future tax savings are not guaranteed. Consult your financial advisor and a qualified tax professional before implementing a Roth conversion strategy.

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