Roth Conversion Planning: A Framework for Decision-Making

In this article, Don James explains why Roth conversions require far more analysis than a simple tax-rate comparison, and walks through the framework that actually drives a smart conversion strategy.

Roth conversions look simple on the surface. Move money from a traditional IRA to a Roth IRA, pay tax on the conversion now, and never pay tax on the money or its growth again. For many retirees and pre-retirees, this is one of the most powerful planning moves available.

But the surface analysis misses most of what determines whether a conversion is actually the right move. Online calculators and rule-of-thumb advice can produce confidently wrong answers because they ignore several layers of how conversions interact with the rest of a household’s finances. This piece walks through the framework that actually drives a smart conversion strategy.

Start with the Core Question

The fundamental question in any Roth conversion analysis is straightforward: will the tax rate you pay on the conversion today be lower than the rate you (or your beneficiaries) would pay on those dollars when they would otherwise come out of the traditional IRA?

If yes, converting is favorable. If no, it isn’t. Everything else is detail.

The complication is that this comparison is harder than it looks. The relevant tax rate today includes federal and state income tax plus several income-driven surcharges that don’t show up on a tax return as obvious line items. The relevant future tax rate depends on what tax law will look like decades from now, who will inherit the money, and what their tax situation will be when they receive it.

Looking Beyond Your Tax Bracket

The marginal income tax bracket is the most visible cost of a conversion, but it isn’t the only one. A complete analysis includes:

Federal and State Income Tax

The conversion is fully taxable at ordinary income rates federally, and at whatever rate your state imposes. For a Colorado resident, that’s the 4.4 percent flat state rate. For someone who has moved from a high-tax state to a no-tax state, the choice of when to convert relative to the move can be meaningful.

IRMAA Surcharges on Medicare Premiums

If you are 63 or older when you convert, the IRMAA cliffs are likely the most overlooked cost. Medicare premiums for Part B and Part D are surcharged based on Modified Adjusted Gross Income (MAGI) two years prior. A Roth conversion at age 64 affects your Medicare premiums at age 66. For 2026, the IRMAA tiers begin at $109,000 for single filers and $218,000 for married filing jointly, with five tiers above that and surcharges that range from modest to substantial.

Critically, IRMAA is a cliff, not a slope. Earning one dollar over a threshold triggers the full surcharge for that tier – typically $1,000 to $4,000 per year per person depending on the tier. A Roth conversion that pushes a couple just over an IRMAA threshold can cost an extra $2,000 to $8,000 in Medicare premiums that wouldn’t appear in any conversion calculator. Worse, the higher premium typically lasts for at least one full year, sometimes two, before the income drops back down.

This is the single most common reason a conversion that looked favorable on paper turns out to be worse than expected. Any serious conversion analysis for someone near or in Medicare age needs to model IRMAA explicitly.

Net Investment Income Tax

The 3.8 percent Net Investment Income Tax doesn’t apply to the conversion itself (Roth conversions are not investment income), but a conversion can push other investment income into the range where NIIT applies. If your MAGI crosses $200,000 single or $250,000 married filing jointly because of a conversion, the 3.8 percent surtax applies to your investment income for the year. This is an indirect cost of converting that rule-of-thumb analysis misses.

Social Security Taxability

For retirees who have started Social Security, a conversion can increase the taxable portion of Social Security benefits. Up to 85 percent of Social Security can be subject to federal income tax depending on combined income. The conversion itself isn’t Social Security taxable, but it raises the income that determines how much of the Social Security benefit becomes taxable. This creates a kind of phantom tax bracket where each additional dollar of conversion income triggers an additional taxable dollar of Social Security.

Capital Gains Bracket Effects

For households with significant long-term capital gains, a conversion can push capital gains from the 0 percent bracket into the 15 percent bracket, or from the 15 percent bracket into the 20 percent bracket. The conversion is ordinary income; the gains are capital gains; but they share the same income stack for purposes of determining which bracket applies.

The Tax Rate Tomorrow Is the Harder Half

Comparing today’s rate to tomorrow’s rate requires estimating what tomorrow’s rate will be. This is genuinely difficult and a fair amount of conversion analysis fails because it makes overly confident assumptions.

Your Future Rate

If you have a large traditional IRA balance, your future tax rate is likely to be driven by Required Minimum Distributions starting at age 73 (rising to 75 in 2033 under SECURE 2.0). For a household with a $2 million traditional IRA at age 73, the first-year RMD is roughly $75,000. That amount, layered on top of Social Security and any other income, can push a retiree firmly into the 22 or 24 percent federal bracket even when their lifestyle would otherwise put them in the 12 percent bracket. If conversions can be done before RMDs begin at rates lower than the eventual RMD-driven rate, they typically make sense.

Your Beneficiaries’ Rate

Under the SECURE Act, most non-spouse beneficiaries of traditional IRAs must empty the account within ten years of the original owner’s death. For beneficiaries in their peak earning years, this can mean substantial inherited IRA distributions taxed at their (often higher) marginal rates. A conversion done at the retiree’s lower rate can save substantial tax for the beneficiaries who would otherwise inherit a tax bomb.

This is particularly powerful for HNW families where the beneficiaries are themselves high earners. A Roth converted at the parent’s 24 percent rate avoids what would otherwise be a 37 percent rate when the inherited account distributes to a high-earning adult child during a peak earning year.

Future Statutory Rates

Whether federal income tax rates will be higher or lower in twenty years is unknowable. The current rate structure (which OBBBA made permanent) is historically moderate. Most analysts believe long-run fiscal pressure points toward higher rates eventually, but that view has been held for many decades without much evidence in the actual rate structure. Conversion analysis should not bet heavily on assumed future rate increases.

Why Multi-Year Roth Conversion Planning Often Works Best

Most successful Roth conversion strategies are not single-year decisions. They are multi-year programs that fill up specific tax brackets in specific years, accounting for the dynamic interactions among the items discussed above.

The classic structure for a retiree with a large traditional IRA:

• Retire at 65, deferring Social Security to 70
• During the years between retirement and Social Security (or Required Minimum Distributions), the household has unusually low income
• Convert in each of those years up to the top of the 22 or 24 percent bracket – typically several hundred thousand dollars of conversion across a five-to-seven year window
• Stop or reduce conversions when Social Security starts and the household’s underlying income rises
• Continue smaller conversions in later years to keep RMDs from pushing the household into higher brackets

Done well, a strategy like this can shift substantial assets from traditional to Roth at rates 5 to 10 percentage points below what those same dollars would face once RMDs begin or when they pass to beneficiaries. Over a 20- to 30-year retirement and the subsequent inheritance, the cumulative tax savings can run into the high six figures for a household with substantial traditional balances.

When a Roth Conversion May Not Be the Best Choice

Conversions are not always the right move. Some situations where the analysis typically favors leaving traditional money in the traditional account:

• The household plans to leave the IRA to charity. Charities are tax-exempt; they don’t care whether the IRA is traditional or Roth. Converting in this case pays tax for no benefit. Qualified Charitable Distributions (QCDs) from traditional IRAs starting at age 70½ are often the better strategy for charitable retirees.
• The household expects substantially lower income in retirement than during working years. If you’ll be in the 12 percent bracket in retirement and you’re currently in the 32 percent bracket, conversions during working years usually don’t pencil. Better to wait until retirement and convert at the lower rate.
• The conversion would have to be paid for from the IRA itself. The math of a Roth conversion is significantly weaker when the conversion tax is paid from withdrawal of the converted IRA dollars rather than from outside cash. Having taxable account dollars available to pay the conversion tax substantially improves the result.
• The household has large medical expenses ahead. Future medical expenses can be itemized to offset traditional IRA withdrawals, providing a tax benefit that disappears if those dollars were converted years earlier.

Roth Conversion Planning Is About More Than This Year’s Taxes

Roth conversions are powerful when the analysis supports them and meaningfully harmful when it doesn’t. The difference is often invisible to one-year calculators because the costs (IRMAA, NIIT, Social Security taxability, capital gains bracket effects) and the benefits (RMD avoidance, beneficiary tax savings, statutory rate hedging) play out across years, not within a single tax year.

For households with substantial traditional balances approaching or in early retirement, working through a multi-year conversion analysis with someone who models the second-order effects is one of the highest-leverage planning conversations available. The decisions made between ages 60 and 75 about how much to convert, in which years, and at what rates often determine more lifetime tax than any other set of decisions a retiree makes.

Evaluate Your Roth Conversion Strategy with DJ Tax Solutions

A Roth conversion is one of the most powerful tax planning opportunities available, but only when it’s executed as part of a comprehensive financial strategy.

At DJ Tax Solutions, we help individuals and families evaluate Roth conversions by considering today’s tax costs, future retirement income, Medicare implications, estate planning goals, and long-term tax efficiency.

If you’re considering a Roth conversion or want to determine whether one fits into your retirement strategy, contact DJ Tax Solutions to schedule an introductory consultation.