Roth Conversion Strategies Before and During Retirement

Key Takeaways:

A Roth conversion is a tax decision with a date on it. Moving money from a traditional individual retirement account (IRA) to a Roth IRA adds the pretax portion of the converted amount counts as taxable income for that year. Which year you pick can matter more than whether you convert at all.
The years between your last paycheck and your first required withdrawal are a window that’s easy to overlook. Once work income stops and before required minimum distributions (RMDs) begin, your taxable income is often the lowest it’s been in decades. That room doesn’t carry forward.
Converting everything in one year is rarely the right starting assumption. A large single-year conversion can push you into higher brackets, raise your Medicare premiums two years later, and increase the taxable share of your Social Security benefit.

A lot of Roth conversion advice answers a question you’ve already settled. By the time you’re a few years from retiring, you know what a Roth account does. What you don’t know is which years to convert in, how much to move in each one, and what the conversion sets off everywhere else on your tax return.

Those three questions are the whole decision. If you’re still assembling the wider picture, our overview of retirement planning in South Carolina covers how the pieces fit together, and this one picks up the conversion piece specifically.

Is It Better to Convert Before or After Retirement?

Converting generally makes more sense in years when your taxable income is unusually low, and for most people those years arrive after work income stops and before required withdrawals begin. A conversion while you’re still drawing a full salary stacks on top of that salary, so the same dollars often cost more in tax.

The core tradeoff is accepting a known, current tax rate to protect against an uncertain future rate. Because future tax rates remain unpredictable, many people spread conversions over several years rather than converting all at once.

What Actually Happens When You Convert

A conversion moves money from a traditional IRA or another eligible retirement account into a Roth IRA, and the converted amount counts as taxable income for that year.¹ From then on, qualified withdrawals come out tax-free.

Two important details matter more than the rest. First, you can’t take it back. A conversion made in 2018 or later can’t be recharacterized as though it had gone to a traditional IRA, so an election you make in December stands even if your income looks different in April.¹

The second is the waiting period. Each conversion carries its own five-year clock that starts on January 1 of the year you converted, and withdrawing the taxable portion of a conversion before that clock runs out can trigger a 10% additional tax if you’re under 59½.² Money you may need inside five years is a poor candidate for conversion.

Should You Convert While You’re Still Working?

A full salary leaves little room, so working-year conversions tend to be small or opportunistic. The question worth asking in those years is whether something has temporarily pushed your income down.

These are the situations that tend to create usable room before you retire:

A partial year of work, because you retired in the spring or started a new job in the fall.
A year with a business loss, a sabbatical, or an unpaid stretch between positions.
A year with an unusually large deduction, such as a concentrated charitable gift.
A year you retire before claiming Social Security, when income drops before benefits replace any of it.

The main risk of converting while you’re working is paying tax at a rate equal to or higher than the one you’re likely to face later. In that case the conversion can cost more than it saves, and the money used to pay the tax gives up years of potential tax-deferred growth.

Why the Years Right After Retirement Open a Window

Paychecks have stopped, Social Security may not have started, and required withdrawals haven’t begun. For many households, that’s the lowest taxable income since early career, and the lower brackets sitting unused in those years are the most useful thing a conversion plan has to work with.

The biggest pitfall is assuming that tax bracket capacity carries forward. Any unused room in a low-income year is permanently lost, and the timeline to take advantage of it is fixed. Mandatory distributions from workplace plans, traditional IRAs, SEP IRAs, or SIMPLE IRAs generally begin at age 73 if you were born 1951–1959, 75 if you were born in 1960 or later. To learn how these mandatory payouts are calculated and scheduled, see our guide on getting ahead of required minimum distributions.

When these mandatory withdrawals start, any remaining pretax funds will automatically generate taxable income each year. Every dollar previously moved into a Roth reduces the amount subject to these required payouts.

How Much Should You Convert in a Single Year?

Instead of transferring a single sum that bumps you into a higher tax bracket, a common strategy is to convert just enough each year to fill your existing bracket, then repeat the process in subsequent low-income years. Determining your specific target figure depends on several key factors on your tax return:

Where the tax money comes from. Paying the conversion tax from outside the IRA leaves the full converted amount working inside the Roth, and paying it from the conversion itself leaves less there and can trigger the 10% additional tax if you’re under 59½.
How much pretax money is left, and how many years you have. A large balance with four usable years before age 73, or age 75 for those born 1/1/1960 and after, calls for a different annual amount than a modest balance with ten.
Whether one spouse will eventually file alone. A surviving spouse often files as a single taxpayer on similar income, which can mean higher rates on the same dollars later.
When you decide. Conversions must be completed by December 31 to count for that tax year, so December is the practical decision point, because by then you know most of the year’s income instead of estimating it in March.

Coordinating that with the rest of the year’s tax picture is ordinary tax planning work, and it goes better with your actual return in front of you than with a rule of thumb.

What a Conversion Does to Medicare and Social Security

Conversion income doesn’t stop at your tax bracket. Two other parts of your retirement finances read the same income figure, and both tend to surprise people.

Medicare Premium Surcharges

Social Security sets the income-related monthly adjustment amount (IRMAA) on Medicare Part B and Part D using modified adjusted gross income from your federal tax return for the year two years before the premium year.⁴ A conversion this year can show up as higher premiums two years from now, long after the decision feels finished.

You can ask Social Security to use more recent income after certain life-changing events, such as retirement or the death of a spouse.⁴ A Roth conversion isn’t one of them, so a surcharge triggered by a conversion generally stands for that year.

The Taxable Share of Your Benefit

Conversion income also feeds the combined income figure that determines how much of your Social Security benefit is taxable. Above $25,000 for most single filers and $32,000 for married couples filing jointly, part of the benefit is taxable, and at higher income up to 85% of it is included in taxable income.⁵

So a conversion can raise the tax on income you were already receiving. That’s a cost worth counting before you decide how much to move, because it doesn’t appear anywhere in the conversion paperwork.

One Large Conversion Year Versus Five Smaller Ones

Numbers make the difference easier to see. Consider this hypothetical example:

Take a retired couple, both born in 1958, with $500,000 in a traditional IRA and the stretch between retiring and age 73 ahead of them. One version converts $300,000 in a single year. That amount stacks on top of whatever else is on the return, so the last chunk of it is taxed at the highest rate they reach, and the resulting income may raise their Medicare premiums two years later.

The other version converts $60,000 a year for five years. Each year’s income stays inside a range they chose, which keeps the surcharge question and the Social Security question manageable instead of concentrating all three effects into one return. Neither path is a projected saving, and which one does more depends on their other income, their filing status, their deductions, and how many low-income years they actually have.

Please note: This example is for illustration only and it ignores growth, inflation, state tax, and every other item on an actual return. It does not represent any actual client and is not a projection or guarantee of any result.

When a Roth Conversion Doesn’t Make Sense

Plenty of conversions happen because the idea sounds good rather than because the math supports it. These are the situations where slowing down is reasonable:

You expect to be in a lower bracket later than you’re in now.
The tax would have to come out of the converted money itself.
You may need those dollars within five years.
You plan to leave a meaningful amount to charity, since pretax dollars can often go to a qualified charity at a lower tax cost.
The balance is small enough that the exercise doesn’t change your lifetime tax picture.

Converting the entire account is almost never the starting point, and our article on two reasons to never convert all of your traditional or rollover IRAs makes the fuller case for keeping some pretax money in place.

What a Roth Account Means for Your Heirs

Some conversions are made for the next generation’s tax rate instead of your own. Most non-spouse beneficiaries who inherit a retirement account must empty it by the end of the tenth year after the owner’s death, with longer options reserved for a narrower group that includes a surviving spouse, the owner’s minor child, and someone no more than 10 years younger than the owner.⁶

An inherited traditional IRA generally delivers taxable income during that decade, often landing in a child’s peak earning years. An inherited Roth generally doesn’t, which can make a conversion worth more to the family than it looks on your own return.

How South Carolina Taxes Factor Into the Decision

Because state-level tax treatment directly alters the financial math, determining an optimal annual conversion threshold is just as much a state-specific consideration as a federal one. How South Carolina taxes retirement distributions can meaningfully influence the point at which additional conversions lose their tax benefit in a given tax year.

Our article on what retirees need to know about South Carolina taxes covers the state’s rules in detail. Confirm the current deductions and rates before you size a conversion, since both the federal and state sides have changed in recent years.

Roth Conversion FAQs

1. At What Age Does a Roth Conversion Usually Make Sense?

There’s no age that settles it, though the years between retiring and your RMD age are where the opportunity tends to be largest, because work income has stopped and required withdrawals haven’t started. Conversions also happen in the fifties and sixties when a low-income year appears. What matters is the income on that year’s return rather than the birthday.

2. How Much Tax Will You Pay on a $100,000 Roth Conversion?

The converted amount is added to your ordinary income for the year and taxed at the rates that apply once it stacks on everything else on your return. A $100,000 conversion for a household already near the top of a bracket is taxed differently than the same conversion for a household with little other income. There’s no flat conversion rate.

3. Does a Roth Conversion Count Toward Your Required Minimum Distribution?

The IRS treats a required minimum distribution as money that has to leave the account first, and it can’t be converted to a Roth IRA. In any year you owe one, you take the required withdrawal, then convert any additional amount you’ve decided on, which means both amounts land on the same return.

4. Is a Market Downturn a Good Moment to Convert?

A lower account value means you convert the same shares for a smaller taxable amount, so downturns do get attention as conversion moments. The catch is that you’re guessing at the recovery, and the tax cost is certain while the rebound isn’t. Market timing is a weaker reason to convert than an unusually low-income year.

Deciding How Much to Convert, and When

Rather than treating conversions as a single, isolated decision, we guide retirees and pre-retirees through an annual evaluation that aligns tax bracket management, Medicare surcharge thresholds, and Social Security impacts. This ongoing approach creates a dynamic, multi-year strategy that we typically revisit late in the year as actual income numbers come in, allowing tailored adjustments rather than a static plan.

If you are nearing retirement or currently navigating lower-income years and wish to explore how this opportunity applies to your financial picture, schedule a conversation with our team to review your options together.

Resources:

Oak Street Advisors, LLC is an SEC-registered investment adviser with offices in Mt. Pleasant and Myrtle Beach, SC. Registration does not imply any certain level of skill or training. This article is for educational and informational purposes only and does not constitute individualized investment, tax, or legal advice or a recommendation to buy or sell any security. Tax laws and benefit rules are complex and change over time; figures are believed accurate as of publication and should be confirmed for your situation. Please consult your own advisers before acting. Our Form ADV Part 2A is available at adviserinfo.sec.gov.