Roth conversions: when they make sense, and when the window is open

What a conversion actually is

You take dollars sitting in a traditional IRA or a pre-tax 401(k) and move them to a Roth IRA or a Roth account inside the plan. Every pre-tax dollar you move becomes ordinary income on that year's return, and no tax is withheld automatically — it is settled through estimated payments or with the return. People are routinely surprised by that in April.

What you buy is a change in tax character. Money in a traditional IRA is a partnership with the Treasury on undetermined terms — you own the account, they own a percentage of it that has not been set yet. Converting settles at today's rate. After that, growth and qualified withdrawals come out tax-free, and the account is not subject to required minimum distributions during your lifetime.

There is no income limit on conversions. There has not been one since 2010. Anyone with a pre-tax balance can convert any amount at any time.

The low-bracket window

A conversion is arbitrage between the rate you pay now and the rate you would have paid later. That means it is worth doing when your current rate is temporarily depressed.

The 2026 brackets are wide in the middle. For a married couple filing jointly, the 22% bracket runs to $211,400 of taxable income and the 24% bracket runs to $403,550. For a single filer, 22% runs to $105,700 and 24% to $201,775. Those wide bands are the working space.

Windows appear on schedule more often than people expect.

The gap years. You retire at 62. You defer Social Security to 70. Required minimum distributions do not begin until 73. That is potentially eleven years of very low taxable income sitting between a career of high earnings and a stack of mandatory withdrawals. During those years you may be living on cash and taxable brokerage assets, showing almost nothing on the return. This is the single most common conversion window, and it closes permanently once the benefits and the RMDs turn on.

A year with little or no income. A sabbatical, a gap between roles, a year spent building something that has not started paying yet, a year of a business loss that offsets other income.

The year after a job change. A December departure and a February start can leave a stub year with two months of salary in it.

A year with a large offsetting deduction. A significant charitable contribution, a bunched donor-advised fund gift, or a large deductible loss can create room that would otherwise go unused.

Why the year after a liquidity event is usually the worst time

This is the part that gets backwards most often.

A founder sells her company in March. Someone mentions Roth conversions. She has a very large traditional IRA and a rollover from an old 401(k), and converting all of it sounds tidy. It is also, in that specific year, close to the worst available idea. She is already at the top marginal rate. Every converted dollar stacks on top of the transaction. She would be paying 37% to avoid an unknown future rate that is very unlikely to be higher.

Now move forward. The proceeds are invested. Her earned income is zero or close to it. Her taxable income might be dividends and interest and not much else. She may be years from Social Security and more years from RMDs.

Those years — the ones after the event, not the one containing it — are frequently the best conversion window a person will ever have. They are also the years when nobody is thinking about taxes, because the hard part is over.

The pattern is consistent enough to state plainly: the liquidity year is for harvesting losses, funding charitable vehicles, and paying the bill. The years after it are for conversions.

Bracket-filling

Nobody has to convert an entire account. The common approach is to convert exactly enough to reach the top of a chosen bracket and stop.

You project taxable income for the year. You identify the ceiling of the bracket you are willing to pay. You convert the difference. Next year you do it again with new numbers.

Two practical notes. Projections in December are far better than projections in June, because capital gain distributions from mutual funds, year-end bonuses, and business income are known by then. And the conversion has to be executed before December 31 — unlike an IRA contribution, there is no April deadline for a prior-year conversion.

The IRMAA problem nobody sees coming

If you are 63 or older, a conversion has a second-order effect that arrives two years later.

Medicare Part B and Part D premiums carry an income-related monthly adjustment amount — IRMAA — based on modified adjusted gross income from two years prior. The 2026 surcharges are set off 2024 returns. The standard 2026 Part B premium is $202.90 per month per person, and the tiers step up from there, beginning above $109,000 of MAGI for single filers and $218,000 for married couples filing jointly.

Two features make this sharp. It is a cliff, not a phase-in — one dollar over a threshold moves you into the next tier for the entire year. And it applies per person, so a married couple pays it twice.

None of that makes a conversion wrong. It makes IRMAA a real cost that belongs in the arithmetic alongside the income tax. A conversion that fills a bracket efficiently and lands a couple one dollar into a higher IRMAA tier has a cost the bracket math did not show.

There is no undo button

Before 2018 you could convert in January, watch the market, and recharacterize the conversion back to a traditional IRA by the following October if it went badly. The 2017 tax law removed that. IRS Publication 590-A states it directly: no recharacterizations of conversions made in 2018 or later. Annual contributions can still be recharacterized. Conversions cannot.

The practical consequence is that a conversion is a decision made once, on incomplete information, that cannot be revised. Convert in January and watch the account fall 30% by June, and you owe tax on the January value. Many people now convert late in the year for exactly this reason — less time for anything to go wrong, and a much better view of the year's actual income.

Two five-year rules, and they are different

People say "the five-year rule" as if there is one. There are two, they measure different things, and they matter to different people.

Rule one governs whether earnings come out tax-free. A Roth IRA distribution is qualified — meaning earnings are tax-free — once you are 59½, disabled, deceased, or a first-time homebuyer, and five tax years have passed since the first contribution or conversion to any Roth IRA you own. This clock starts once, on January 1 of the year of your first Roth IRA funding, and never restarts. Open one Roth IRA at 45 with a small amount and the clock is running for every Roth IRA you will ever have.

Rule two governs the 10% early distribution penalty on converted amounts. Each conversion carries its own five-year clock. Withdraw converted principal before that clock runs and before 59½, and the 10% additional tax can apply — even though the amount was already taxed at conversion. Once you reach 59½, this rule stops mattering.

Roth IRA distributions come out in order: regular contributions first, then conversions oldest to newest, then earnings. That ordering is what makes rule two navigable at all.

For someone converting at 64 in the gap years, rule two is irrelevant and rule one is usually long satisfied. For someone converting at 48 who might need the money at 52, both matter.

Paying the tax from outside the account

Paying from taxable savings means the entire converted balance lands in the Roth and compounds tax-free. Paying from the conversion itself means withholding a slice, which shrinks the Roth and — if you are under 59½ — makes the withheld portion an early distribution subject to the 10% penalty.

As a rough test: if there is no cash outside the account to pay the tax, the case for converting weakens considerably. Not always fatally. But the arithmetic that makes conversions attractive largely depends on moving the full balance across.

Heirs, and the 10-year rule

Most non-spouse beneficiaries who inherit a retirement account now have to empty it within ten years. Under the final regulations, if the original owner died on or after their required beginning date, annual distributions are also required in years one through nine — a requirement that took effect in 2025.

For an inherited traditional IRA, that means ten years of forced taxable income landing on a beneficiary who is often in their peak earning years. An inherited Roth IRA still has to be emptied on the same schedule, but the distributions are not taxable.

This is why conversions sometimes make sense even when they do not help the account owner. If a 71-year-old in the 24% bracket has children who are surgeons in the 37% bracket, converting at 24% is a transfer of value to the next generation. The estate also shrinks by the tax paid, which is its own effect.

State tax, and a planned move

State treatment travels with the year of the conversion, not the year of the withdrawal.

Pennsylvania does not tax most retirement income for residents who have reached retirement age, which changes the calculus for our Yardley clients relative to a New Jersey or New York resident a short drive away. If a move to a no-income-tax state is realistically on the calendar, converting before the move can mean paying state tax that would not have been owed later. Establishing residency is a facts-based determination and high-tax states audit it, so the sequencing is worth getting right before it is executed.

A note for airline pilots

Pilots flying under Part 121 face mandatory retirement at 65. That is a legislated date, not a choice, and it creates a window with unusually clean edges.

A pilot who stops flying at 65, defers Social Security to 70, and reaches RMD age at 73 has roughly eight years with no wage income and often a very large pre-tax balance — a 401(k) that absorbed years of high deferrals and company contributions. That combination is close to the textbook case for multi-year bracket-filling.

Two complications. Pilots with a frozen defined benefit pension or a lump-sum election need that decision modeled first, because a lump sum landing in a single year consumes the room a conversion would have used. And pilots who take a management job, fly internationally under different rules, or move to Part 91 corporate flying after 65 may have income the plan did not assume. Legislation to raise the age has been introduced repeatedly and has not become law; a change would move the window, not eliminate it.

What to gather, and who to coordinate with

Assemble before modeling: current balances and pre-tax versus after-tax composition of every IRA, 401(k), 403(b) and 457 you hold; any Forms 8606 showing basis in traditional IRAs; the last two filed returns; a realistic projection of this year's income including capital gain distributions and business income; your Social Security claiming plan; and the date you expect RMDs to begin.

Coordinate with your CPA on the year-specific projection — a conversion interacts with capital gain rates, the net investment income tax, deduction phaseouts, and state tax, and none of that shows up in a bracket table. Coordinate with your Medicare or benefits contact if anyone in the household is within two years of 65. Coordinate with your estate attorney if beneficiary tax rates are part of the reasoning. And coordinate the whole thing with a multi-year plan rather than a single-year decision, because the value of conversions comes from doing them repeatedly in the right years, not from doing one large one.

This article is educational and is not tax, legal, or investment advice. Individual circumstances differ, and the rules change.