Roth Conversions in Retirement

For most retirees, the years between final paycheck and first RMD are the lowest-AGI period of their adult lives. They are also the highest-leverage years for Roth conversions — the chance to move money from Traditional to Roth at far lower tax rates than will apply once Social Security, pensions, and RMDs all come on stream simultaneously.

Why retirement opens the window

The arithmetic:

• Age 60–65: typically no W-2 income, possibly no Social Security yet, no RMDs. AGI from interest and minor capital gains might be $20,000.
• Age 65–73: Social Security at FRA + perhaps small portfolio income. AGI maybe $50,000–$70,000.
• Age 73+: RMDs (mandatory) + Social Security + pension + portfolio income. AGI can jump to $150,000+ for a household with $1.5M of pre-tax retirement assets.

The pre-RMD years contain meaningful unused "bracket headroom" — space at the 12% and 22% federal brackets that could be filled with Roth conversions. Once age 73 arrives, that space is filled by mandatory withdrawals, often pushing all conversion activity to the 24% bracket or higher.

The bracket-filling exercise

For a married couple, the 2025 federal brackets:

A retired couple with $30,000 of pension income and no other taxable income has $96,950 + $30,000 (standard deduction) − $30,000 = $96,950 of headroom in the 12% bracket. Converting $96,950 of Traditional IRA to Roth costs $9,000 of federal tax (about 9.3% effective on the converted amount). If those dollars would otherwise come out at the 24% bracket at age 75, conversion saves $14,500 per year of conversion — a substantial rate arbitrage.

The IRMAA cost

Large conversions can push MAGI into IRMAA brackets — see our IRMAA article. The cost is real but two-year-delayed: a 2026 conversion bumps 2028 Medicare premiums. Factor IRMAA into the effective conversion rate. A "12% bracket conversion" that crosses an IRMAA threshold can carry a true marginal cost of 25%+ when the surcharge is included.

The ACA Premium Tax Credit cost

For pre-65 retirees on marketplace coverage, conversions raise MAGI and clawback the PTC — often a 10%–30% effective additional tax (see our ACA article). For retirees with significant pre-Medicare years on marketplace coverage, conversions are usually better deferred until 65.

The five-year clock

Each conversion has its own five-year clock under IRC §408A(d)(3)(F). Conversion dollars (the principal converted) are subject to a 10% early-withdrawal penalty if withdrawn within five years of conversion and before age 59½. The penalty does not apply after 59½. For retirees already past 59½, the five-year rule is largely moot — but planning conversions for a younger spouse should consider it.

The estate-planning angle

Roth IRAs pass to beneficiaries free of income tax. Heirs still face the 10-year drawdown rule under SECURE, but they pay no income tax on the withdrawals. A Roth IRA passing to a high-bracket adult child is dramatically more valuable than a Traditional IRA of the same balance — the Roth is worth (1 − heir's marginal rate) times the Traditional. For households with both ample retirement assets and high-income heirs, conversion is partly an estate-planning move, not just a personal-tax move.

Worked example: the long view

A 65-year-old couple has $1.5M Traditional IRA, $500K Roth IRA, $30,000 of pension. Delays Social Security to 70.

Without conversion: at 73, RMDs begin (~$57,000 in year 1). Combined with Social Security and pension, AGI hits ~$140,000, partially taxed at 22% and 24%. Lifetime tax on the IRA: about $300,000.

With aggressive conversion ages 65–72: convert $80,000/year to Roth, paying 12% federal. Total conversion tax: $80,000. Remaining Traditional IRA at 73: ~$650,000 (after growth). RMDs at 73: ~$25,000. Lifetime tax on the IRA + conversion tax: about $190,000. Net saving: ~$110,000.

Plus the surviving spouse's RMDs are lower, the surviving-spouse single-filer brackets are less punishing, and any Roth passing to heirs has saved another layer of tax.

Common mistakes

• Skipping the analysis because "I don't want to pay tax now." The choice is not "pay tax or don't pay tax." It is "pay 12% now or 24% later." Front-loading the tax is almost always cheaper.
• Forgetting the IRMAA and ACA interactions. The marginal cost of a conversion is the federal income tax plus Medicare premium increases plus ACA subsidy clawback.
• Converting too much in a single year. Climbing two brackets to convert the entire balance in one year is rarely optimal. Spread conversions over the available pre-RMD window.
• Forgetting the withholding. Have the tax paid from outside funds, not from the conversion itself. Withholding from the converted amount reduces the Roth balance and triggers a 10% penalty on the withheld amount if you are under 59½.

Sources

• Internal Revenue Code §408A, Roth IRAs (Cornell LII): law.cornell.edu/uscode/text/26/408A
• Internal Revenue Code §408A(d)(3), conversion rules: law.cornell.edu/uscode/text/26/408A
• IRS Publication 590-A and 590-B, contribution and distribution rules: irs.gov/forms-pubs/about-publication-590-a
• IRS Notice 2024-80, 2025 inflation adjustments for tax brackets and deductions: irs.gov/pub/irs-drop/n-24-80.pdf
• Joint Committee on Taxation, "Description of Energy Tax Credits and Tax Provisions Affecting Retirement Plans" (2023).

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