The Retirement Tax Time Bomb: How to Defuse It with Roth Conversions

Many higher-net-worth retirees face a hidden tax challenge: a large 401(k) or IRA that will eventually trigger Required Minimum Distributions (RMDs). These distributions can increase your taxable income, impact Medicare premiums through IRMAA, and raise the percentage of Social Security benefits subject to tax.

Fortunately, proactive planning — such as Roth conversions — may help manage or reduce these impacts.

Why Roth Conversions Might Make Sense Before Age 73

If you have $500,000 or more in pre-tax retirement accounts, RMDs can eventually push you into a higher tax bracket — right around the time you begin receiving Social Security and enrolling in Medicare.

Example:
At age 73, an IRA valued at $1 million would have an RMD of roughly $38,000, assuming the IRS Uniform Lifetime Table. These distributions are taxed as ordinary income — and they’re mandatory, whether you need the income or not.

Over time, RMDs may increase your lifetime tax liability and affect other aspects of your financial plan.

Conversion Windows: When It May Pay to Act

There are a few timeframes where Roth conversions can be especially effective:

• Between retirement and age 73 (or 75): You may be in a lower marginal tax bracket, creating a favorable window for partial conversions.
• Before starting Social Security: Converting while you have full control over your MAGI may reduce future IRMAA surcharges and minimize taxation of Social Security benefits.
• During market declines: You may be able to convert more shares at lower values, potentially resulting in more tax-free growth over time.

How Much Should You Convert?

The optimal amount to convert varies by person. Rather than converting everything at once, many strategies focus on “filling” lower tax brackets each year — often the 12%, 22%, or 24% marginal brackets.

Tax software or financial modeling tools can be used to calculate conversion amounts that align with your specific income level, tax filing status, and Medicare exposure.

Bonus: Legacy Planning

Roth IRAs also provide benefits to heirs. There are no RMDs during your lifetime, and distributions to beneficiaries may be tax-free if rules are followed. This may provide both tax efficiency and flexibility in estate planning.

Final Thought

Roth conversions can be a powerful part of a retirement tax strategy — but results depend on timing, tax brackets, and coordination with other benefits like Medicare and Social Security.

Considering a conversion? It may help to model the impact over time and weigh the trade-offs in a structured way.

📅 Schedule a Tax-Smart Retirement Planning Call to explore your options.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. (22-LPL)

Securities offered through LPL Financial, member FINRA/SIPC. Investment Advice offered through Convergence Financial, a registered investment advisor. Convergence Financial and Telos Strategic Wealth are separate entities from LPL Financial.

Sources and References

1. IRS – Required Minimum Distributions (RMDs)
   www.irs.gov/retirement-plans/required-minimum-distributions
2. IRS – Uniform Lifetime Table (2022 and beyond)
   www.irs.gov/pub/irs-pdf/p590b.pdf
3. Social Security Administration – Income Taxes and Your Social Security Benefits
   www.ssa.gov/benefits/retirement/planner/taxes.html
4. Medicare.gov – Income-Related Monthly Adjustment Amount (IRMAA)
   www.medicare.gov/your-medicare-costs/part-b-costs
5. IRS – Roth IRA Conversion Rules and Considerations
   www.irs.gov/retirement-plans/roth-iras

Tax Policy Center – RMD Impact Estimates www.taxpolicycenter.org