Roth Conversions: When Paying Tax Early Pays Off

A Roth conversion moves money from a traditional (pre-tax) account into a Roth account. You pay income tax on the converted amount this year, and in exchange the money and everything it earns can come out tax-free later. This chapter explains when that trade makes sense, how to size a conversion so it does not cost more than it saves, and the hidden costs that catch people out: Social Security taxation, Medicare surcharges and health insurance subsidies. Volume 1 covers what Roth and traditional accounts are; this chapter assumes you have both kinds and are deciding whether to move money between them.

The trade: a tax rate now against a tax rate later

Start with one fact that clears up most of the confusion. If your tax rate is the same when you convert as it would be when you withdraw, a conversion changes nothing. Suppose a dollar in a traditional IRA grows to some multiple before you take it out. Taxed at the end, you keep that multiple times one minus your rate. Converted today at the same rate, you keep one minus the rate, and it grows by the same multiple. Multiplication does not care about the order. The growth is not what makes a Roth valuable; the difference in tax rates is.

So a conversion pays off in three situations:

1. Your rate today is lower than your rate later. This is the main reason, and it is common in the years between leaving work and starting Social Security and required minimum distributions, when taxable income can be unusually low.
2. You pay the tax from money outside the account. Paying the conversion tax from a savings or brokerage account effectively moves more money into the tax-free wrapper. The whole converted amount keeps growing tax-free, and the cash you used for the tax would otherwise have kept producing taxable interest and gains.
3. Something other than your own rate matters. Roth IRAs have no required minimum distributions for the original owner, and since 2024 neither do Roth accounts inside a 401(k). Heirs who inherit a Roth generally take the money out tax-free (most non-spouse heirs must still empty it within ten years). A surviving spouse who files as single may face higher brackets on the same income, which can make converting while both are alive worth more.

A conversion loses when the reverse is true: converting at a high rate today to avoid a lower rate later, or paying the tax out of the converted money itself.

When the windows open

Your taxable income is rarely flat across a lifetime. The years worth looking at closely are the ones where it dips.

• The gap years. Someone who stops working at 60 and delays Social Security to 70 may have a decade with little taxable income besides what they choose to withdraw. Required minimum distributions now begin at 73 for people born from 1951 to 1959 and at 75 for those born in 1960 or later, which lengthens the window.
• A low year while still working. A sabbatical, a gap between jobs, a business loss or a year of parental leave can leave room in a low bracket.
• A market drop. Converting a fixed number of shares while their price is down means paying tax on a smaller amount. If the shares recover, the recovery happens inside the Roth. This is not a reason to convert more than you planned, only a reason to do this year's planned conversion sooner.

Conversions are permanent. Since 2018 a conversion cannot be undone (recharacterized), so if the market falls after you convert, you still owe tax on the higher amount. Many people convert in pieces through the year, or wait until late in the year when they know their income.

Sizing a conversion: filling a bracket

The usual method is to convert just enough to fill your current tax bracket and stop before the next one. In 2026, for married couples filing jointly, the 12% bracket ends at $100,800 of taxable income, the 22% bracket at $211,400 and the 24% bracket at $403,550. For single filers the same brackets end at $50,400, $105,700 and $201,775. Taxable income is after the deduction: the 2026 standard deduction is $32,200 for a joint return and $16,100 for a single one, plus an extra amount for each person 65 or older.

The reasoning goes like this. Estimate your taxable income for the year without the conversion. Subtract that from the top of the bracket you are in. The difference is the most you can convert at that rate. Whether to go into the next bracket depends on what rate you expect to pay later: if you expect to be in the 24% bracket in your seventies because of required distributions and Social Security, converting at 22% or 24% today is reasonable, and converting at 32% is usually not.

Spread large balances over several years rather than converting in one. A single large conversion pushes the top slice into high brackets; the same total spread across five or ten low-income years can be taxed mostly at lower rates. The Roth conversion calculator runs the 2026 brackets for you, and the Roth conversion ladder calculator plans a multi-year schedule.

The hidden costs: income that moves other numbers

Converted dollars count as income everywhere income is measured, not only on the tax bracket table. Three thresholds matter most.

Social Security taxation. Once you collect Social Security, up to 85% of the benefit can become taxable. The test uses provisional income: your other income plus tax-exempt interest plus half your benefit. Benefits start to be taxed above $32,000 of provisional income for a joint return ($25,000 single), and up to 85% can be taxed above $44,000 ($34,000 single). These lines are set in the law and have never been raised for inflation. In the range where each extra dollar of income also makes more of your benefit taxable, a conversion dollar can be taxed at up to 1.85 times your bracket rate. This is one reason to convert before Social Security starts.

Medicare premiums (IRMAA). Medicare Part B and Part D premiums rise in steps with your modified adjusted gross income from two years earlier. For 2026 the surcharges start above $218,000 for a joint return and $109,000 for a single one. Each step is a cliff: one dollar over adds the whole surcharge for the year. A conversion at 63 can therefore raise your premiums at 65. The Medicare chapter of this book explains the surcharge in more detail.

Health insurance subsidies before 65. If you buy marketplace coverage, the premium tax credit depends on your income for the year, and a conversion counts. For 2026 the credit ends entirely above 400% of the poverty line. A conversion that crosses that line can cost far more in lost subsidy than it saves in future tax. The chapter on healthcare before Medicare covers this.

A smaller one: from 2025 to 2028, people 65 and older get an extra deduction that shrinks as income rises, so a conversion in those years can also reduce that deduction. And state income tax applies to conversions in most states. Converting while living in a high-tax state and then retiring to a state with no income tax usually works against you; the reverse can work in your favor.

Mechanics that trip people up

• Pay the tax from outside the account if you can. If tax is withheld from the conversion itself, less money reaches the Roth, and if you are under 59½ the withheld amount is a distribution that can also carry the 10% additional tax.
• The five-year rule for conversions. Each conversion starts its own five-year clock. If you are under 59½ and withdraw converted money within five years, the 10% additional tax can apply to the part that was taxable when converted. After 59½ this clock stops mattering for the penalty, though a separate five-year rule still decides whether Roth earnings come out tax-free.
• After-tax money in an IRA. If any of your traditional IRAs hold nondeductible contributions, the pro-rata rule decides how much of a conversion is taxable. You cannot pick only the after-tax dollars. The next chapter explains it in full.
• Reporting. A conversion from an IRA is reported on Form 8606, Part II, and you receive a Form 1099-R from the custodian. Conversions inside a 401(k) are reported on the 1099-R the plan sends.
• Estimated tax. A large conversion can leave you underpaid for the year. Paying estimated tax in the quarter of the conversion, or increasing withholding from a paycheck or pension, avoids an underpayment penalty.