Turning Today’s Taxes into Tomorrow’s Tax-Free Growth
Why This Matters
When we’re looking at planning strategies that can have a meaningful impact over time, tax management is one of the most valuable areas to focus on. With so much in life that we can’t control, taxes are one of the few variables where thoughtful planning can make a real difference.
One of the most impactful strategies we evaluate with clients is the Roth conversion.
What Is a Roth Conversion?
In its simplest form, a Roth conversion is moving pre-tax retirement dollars into a Roth IRA, where those funds can grow tax-free.
To do this, you pay income taxes today on the amount converted. In other words, you’re making the tradeoff of paying taxes now in exchange for the ability to let those funds grow and be withdrawn tax-free in the future.
The concept itself is straightforward. The value comes from how and when it’s applied.
Why Consider a Roth Conversion?
A common question is: why would I choose to pay taxes now if I don’t have to?
The answer centers around timing. We’re not trying to avoid taxes — we’re trying to pay them at the right time.
Roth conversions can be particularly valuable when you expect to be in a higher tax bracket in the future. By paying taxes at a known (and potentially lower) rate today, you can create tax-free growth and withdrawals down the road.
This becomes especially important for those with large pre-tax retirement accounts. Once required minimum distributions (RMDs) begin, those balances can work against you by forcing income that pushes you into higher tax brackets.
Roth conversions can help reduce that future burden while also increasing flexibility. Instead of being forced to take income from pre-tax accounts, you can better control how much income you recognize each year.
There can also be estate planning benefits. Traditional IRAs passed to beneficiaries are generally fully taxable and must be distributed within 10 years. If your heirs are already in higher tax brackets, those dollars may be taxed at rates higher than you would have paid. Roth IRAs, on the other hand, can be distributed tax-free, allowing more of the account value to be preserved.
When Roth Conversions Can Make Sense
One of the most important considerations is timing.
The most common opportunity is in the years between retirement and when RMDs begin. During this window, income is often temporarily lower, creating an opportunity to take advantage of lower tax brackets.
Other situations where Roth conversions may make sense include:
Years with unusually low income
Periods with large deductions, such as charitable giving or losses
Gaps between jobs or career transitions
Business owners with fluctuating income
Bonus-heavy compensation that varies from year to year
A helpful way to think about this is “filling up” lower tax brackets while they’re available, rather than leaving that space unused.
How the Strategy Works
The mechanics of a Roth conversion are relatively simple.
Funds are moved from a traditional (pre-tax) IRA into a Roth IRA. The amount converted is treated as ordinary income in that year and taxed accordingly. If done properly, there is no early withdrawal penalty — it’s simply a shift from a pre-tax account to a Roth account.
Once in the Roth IRA, those funds can continue to grow tax-free.
A Simple Example
Imagine a couple who recently retired with $2 million in pre-tax retirement accounts. They haven’t started Social Security, have no required minimum distributions yet, and are covering their expenses from taxable savings.
If their taxable income is around $50,000, they may fall comfortably within the 12% tax bracket.
However, if their portfolio grows and RMDs begin in a few years, those required withdrawals alone could push their income significantly higher — potentially into the 22% bracket or beyond, especially when combined with Social Security and other income.
In the years before RMDs begin, they may have an opportunity to intentionally recognize additional income through Roth conversions while staying within that lower bracket.
If they “fill up” that bracket for several years, they can shift a meaningful portion of their portfolio into a Roth IRA, where it can continue growing tax-free, while also reducing future RMDs and smoothing out their long-term tax picture.
Key Tradeoffs to Be Aware Of
While Roth conversions can be a powerful strategy, they need to be implemented carefully.
If income projections are off, additional income from investments, capital gains, or bonuses could push part of the conversion into a higher tax bracket, reducing its effectiveness.
For retirees, one of the most common considerations is IRMAA — the income-related monthly adjustment that increases Medicare Part B and Part D premiums at higher income levels. A large conversion can unintentionally push income into a higher IRMAA tier, increasing healthcare costs.
Other potential impacts include the loss or reduction of certain tax credits and deductions, as well as effects on income-based programs.
Because of these factors, Roth conversions are often best approached as a multi-year strategy rather than a one-time decision.
Cash Flow Matters
Roth conversions create taxable income, so it’s important to have cash available to cover the tax liability.
In most cases, it’s more effective to pay those taxes from funds outside of the IRA. Withholding taxes directly from the conversion reduces the amount that actually makes it into the Roth account.
For example, if you convert $100,000 but withhold 30% for taxes, only $70,000 ends up in the Roth — yet you still owe taxes on the full $100,000.
Paying the taxes from outside funds allows the full converted amount to remain invested and benefit from long-term tax-free growth.
The Long-Term Impact
Over time, the value of Roth conversions is less about any single year and more about the cumulative effect.
By gradually shifting assets into a Roth IRA, you can reduce future required distributions, smooth out taxable income in retirement, and create more flexibility in how you draw from your portfolio.
That flexibility can be just as valuable as the tax savings themselves. It gives you more control over your income, your tax brackets, and how your overall plan adapts over time.
Final Thoughts
Roth conversions are not a one-size-fits-all strategy. Their effectiveness depends on your income, tax situation, time horizon, and overall financial plan.
In some cases, Roth conversions are implemented gradually over multiple years. In others, the opportunity is more limited — and the focus is on taking advantage of specific windows where the tax environment is particularly favorable.
Because of that, Roth conversions are often best viewed as an ongoing planning consideration. Some years may present strong opportunities, while others may not make sense at all.
This is something we evaluate as part of the ongoing planning work we do with our clients, and we’re always happy to discuss how it fits into your plan.