Roth Conversion Strategies: Turn Tax-Deferred into Tax-Free
Your traditional IRA or 401(k) is a tax time bomb. Roth conversions can defuse it—if done strategically.
Pay taxes now to avoid them forever
The Roth Conversion Decision
Traditional IRA/401(k)
- Tax deduction when contributed
- Tax-deferred growth
- 100% taxed at withdrawal
- Required Minimum Distributions at 73
- Heirs pay tax on inherited IRA
Roth IRA
- No tax deduction when contributed
- Tax-free growth
- Tax-free at withdrawal
- No RMDs for original owner
- Tax-free inheritance for heirs
Roth conversion = Move money from traditional to Roth. Pay income tax now. Never pay tax again.
The math behind the decision
When Roth Conversions Make Sense
Low-Income Years
Job transition, sabbatical, early retirement before Social Security. Lower income = lower tax bracket = cheaper conversion.
Expect Higher Future Taxes
Tax rates historically low. Massive national debt. TCJA expires 2025. If you expect rates to rise, convert now at lower rates.
Long Time Horizon
The longer money stays in Roth, the more valuable tax-free growth becomes. Younger converters benefit most.
Large Traditional Balances
$2M+ in traditional accounts means $80K+ RMDs at 73. This can push you into high brackets and increase Medicare premiums.
Legacy Planning
Leaving tax-free Roth to heirs is more valuable than tax-burdened traditional IRA. You pay the tax so they don't have to.
Medicare IRMAA Planning
High income in retirement triggers Medicare premium surcharges. Roth withdrawals don't count as income for IRMAA calculations.
A systematic approach for FIRE and early retirees
The Roth Conversion Ladder
How the Ladder Works
Retire early with most savings in traditional 401(k)/IRA
Each year, convert amount equal to your annual expenses
Wait 5 years (Roth conversion 5-year rule)
Withdraw previous conversions tax-free and penalty-free
Repeat annually—always pulling from 5-years-ago conversions
💡 Key insight: In low/no income years, you can often convert in the 0%, 10%, or 12% brackets. Much cheaper than paying 22-32%+ during your working years.
Optimize conversions to your tax bracket
Bracket-Filling Strategy
The goal: Convert just enough to "fill" your current tax bracket without spilling into the next one.
| Tax Bracket (2024 Married) | Taxable Income Range | Conversion Strategy |
|---|---|---|
| 10% | $0 - $23,200 | Convert aggressively—this is cheap! |
| 12% | $23,201 - $94,300 | Still great—fill this bracket |
| 22% | $94,301 - $201,050 | Consider if expecting 24%+ in future |
| 24% | $201,051 - $383,900 | Evaluate carefully—may be your peak bracket |
| 32%+ | $383,901+ | Usually not worth converting at this rate |
Important factors to evaluate
Roth Conversion Considerations
✓ Pros of Converting
- • Tax-free growth forever
- • No RMDs (more control)
- • Tax-free inheritance
- • Reduces future taxable income
- • Medicare IRMAA planning
- • Locks in today's (low) tax rates
✗ Cons of Converting
- • Immediate tax bill
- • Need outside funds for taxes
- • 5-year rule on conversions
- • Can't undo (no recharacterization)
- • May lose current deductions
- • Tax rates might actually fall
When Roth isn't enough
Section 7702: The Alternative
Roth is great, but it has limits. Section 7702 offers tax-free growth AND access with no contribution limits.
Roth IRA Limitations
- • $7,000/year contribution limit
- • Income limits on direct contributions
- • 5-year rules on contributions and conversions
- • 10% penalty on earnings before 59½
Section 7702 Advantages
- • No contribution limits
- • No income limits
- • Access at any age via policy loans
- • No penalties for early access
Frequently Asked Questions
Should You Convert to Roth?
The answer depends on your tax bracket, time horizon, and goals. Let's run the numbers for your specific situation.