Written by 
Edited by 
At age 55 with $900,000 in a traditional individual retirement account (IRA), converting $100,000 per year to a Roth IRA could help reduce required minimum distributions (RMDs) and related taxes. Taking an incremental Roth conversion approach can effectively distribute the tax impact. Although Roth conversions do create their own tax liabilities, paying those taxes now may result in lower, more predictable taxes during your retirement.
A financial advisor can review your full financial picture and provide personalized guidance on Roth IRA conversions and other retirement planning decisions.
RMD Basics
When you use a traditional IRA your retirement savings grow tax-free, but only up to a point. Once IRA holders reach age 73, they must start taking annual RMDs. The RMD calculations are based on IRS life expectancy tables and account balances. This is a matter of concern because each RMD withdrawal adds to your taxable income for that year. With large IRAs, annual RMDs can easily push retirees into higher income tax brackets, resulting in bigger tax bills. Avoiding RMDs with Roth Conversions
Since a Roth IRA isn’t subject to RMD rules, converting a traditional IRA to a Roth account can allow you to avoid some future mandatory withdrawals. The catch is, when you convert IRA funds into Roth funds you trigger ordinary income taxes immediately. One way to manage this is through a partial Roth conversion which distributes the tax impact over time to potentially reduce the total tax burden.
Note that if you do choose to pursue a Roth conversion, you won’t be able to make withdrawals within five years of opening the account. This rule applies regardless of your age.
RMD Impact in Action
Starting with a $900,000 IRA at age 55, assuming a 5% annual growth rate and no contributions or withdrawals, your IRA would be worth approximately $2,165,957 when you turn 73 in 18 years. Dividing $2,165,957 by the IRS life expectancy factor of 26.5 for a 73-year-old gives you $81,734. This would be your first-year RMD.
Adding that $81,734 distribution to other retirement income sources increases the tax rate that applies to the RMDs.
For example, assume at age 73 your income from investments or similar taxable sources is $24,000 per year.Now add $81,734 from RMDs. Your taxable income becomes $105,734, bumping you into the 24% tax bracket, and a much higher tax bill.
The Effect of Partial Conversion
You could avoid having to take these RMDs by converting your IRA to a Roth. However, converting the entire $900,000 now would produce a six-figure bill due next time you file your taxes. Alternatively, a gradual conversion of $100,000 per year could reduce that tax hit and spread it out over time.
An important feature of this strategy is you can adjust it to keep your total taxable income just below the threshold for the next tax bracket. That’s the right idea.
If you stick with the $100,000 annual conversion, you’ll move your entire IRA into a Roth IRA not subject to RMDs over a period of about 12 years (assuming the remaining funds in your IRA grow at 5%.) Meanwhile, you may be able to keep your current taxable income in a lower tax bracket than if you did larger conversions.
Impact on Social Security and Medicare
Roth conversions can influence more than just your tax bill in retirement, they can also affect how much of your Social Security benefits are taxed and what you’ll pay for Medicare. That’s because both programs base key calculations on your income, which includes amounts converted from a traditional IRA to a Roth IRA.
Social Security Taxation
The IRS uses a formula called provisional income to determine how much of your Social Security benefits are taxable. Provisional income includes half of your Social Security benefits plus other taxable income sources, such as IRA withdrawals and Roth conversions.
- If your provisional income exceeds $25,000 for single filers or $32,000 for married couples filing jointly, a portion of your benefits, up to 85%, may become taxable.
- Large Roth conversions can temporarily increase your taxable income in a given year, causing a greater share of your Social Security benefits to be taxed.
Medicare Premiums and IRMAA
Medicare premiums are also affected by income. The Income-Related Monthly Adjustment Amount (IRMAA) can increase your Medicare Part B and Part D premiums once your modified adjusted gross income (MAGI) crosses certain thresholds.
- In 2025, single filers whose 2023 MAGI was above $106,000 (or $206,000 for joint filers) will pay higher premiums.
- Since Roth conversions increase your income in the year you convert, they can temporarily push you above these thresholds for up to two years (because IRMAA is based on your tax return from two years prior).
Careful planning such as spreading conversions across multiple years or timing them before Social Security or Medicare enrollment can help reduce these impacts.
Things to Consider Before Converting
Roth conversions carry risks and limits. One challenge is that you’ll need sufficient non-retirement funds to pay conversion taxes now. Also, future tax rates and laws frequently change. Tax rates could decline in the future. Fluctuating investment returns and personal factors like deductions and state taxes also can affect the result of a Roth conversion plan such as this.
An important consideration is that converted Roth funds typically can’t be withdrawn tax-free for five years after transfer. Earnings withdrawn sooner may incur taxes and penalties. This means Roth conversion planning requires predicting cash flow needs several years out.
Discuss how various tax strategies might impact your portfolio with a financial advisor.
Frequently Asked Questions (FAQs)
How Do I Know How Much To Convert To A Roth IRA Each Year?
It depends on your current tax bracket, other income sources and long-term retirement goals. Many retirees aim to “fill up” their current bracket, for example, converting just enough to stay within the 22% or 24% income tax bracket, without triggering higher Medicare or Social Security taxation.
Can I Undo A Roth Conversion If I Change My Mind?
No. Since 2018, Roth conversions are irreversible. Once funds are converted and taxes are owed, the transaction cannot be recharacterized back into a traditional IRA. That’s why estimating the tax impact in advance is essential.
Should I Convert Before Or After I Start Collecting Social Security?
Ideally, Roth conversions are most effective before claiming Social Security, since conversions increase taxable income and could cause a larger share of your benefits to be taxed later. Performing conversions early such as between retirement and age 70 often minimizes long-term taxes.
Do Roth Conversions Affect My Medicare Eligibility?
They don’t affect eligibility, but they can temporarily increase your premiums if your income crosses IRMAA thresholds. Timing conversions in years with lower income or spacing them out gradually can help minimize these surcharges.
Bottom Line
Strategic partial Roth IRA conversions enable investors to take control over their tax liability timing. Paying taxes now through gradual conversions may reduce overall lifetime taxes compared to unpredictable mandatory RMD withdrawals decades later. But Roth transfers also create present tax bills and limit tax-free access to converted assets for five years. Determining suitable Roth conversion amounts and timing given uncertain future tax rates and laws requires assessing several factors about the present and making reasonable assumptions about the future. A financial advisor can also help you navigate the intricacies of a Roth conversion.
Tips
- If you have questions about Roth IRA conversions or want help developing a retirement distribution strategy tailored for your situation, consider connecting with a financial advisor. SmartAsset’s free tool matches you with financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- To estimate out how much your nest egg will be worth years or decades from now, use SmartAsset’s Investment Return and Growth Calculator.
Photo credit: ©iStock.com/insta_photos