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Wednesday, December 03
Roth Conversions 101
Paying taxes now to avoid them later - who should convert this year?
If you’ve ever wished taxes were simpler in retirement, Roth conversions are one of the few moves that actually let you trade today’s known tax bill for tomorrow’s tax-free withdrawals. But they’re not magic, they’re a strategic tool. Use them in the right year, and they can reduce lifetime taxes and shrink future RMDs. Use them at the wrong time, and you’ll pay more than necessary.
Here’s how I explain it to friends in one sentence:
Do a Roth conversion in years when your taxable income is unusually low (so you pay taxes at a lower bracket), or when future tax rates look likely to be higher.
Below I’ll show who that usually includes, how to check your bracket, and the exact tools I use to model the math. 👇
🌟 Today’s Highlights
Why converting now can save you money later
The three groups who should seriously consider converting this year
The quick tools to test whether a conversion makes sense (and where to run the numbers)
Important rules & filing notes you must know
📊 Stat / Source of the Day
Roth conversions let you move pre-tax retirement dollars into a Roth where future qualified withdrawals are tax-free, a strategy many advisors recommend in low-income years to reduce future RMD-driven tax spikes. Trusted primers and guidance: Vanguard (Roth conversion overview) and Fidelity’s Roth conversion calculator. Vanguard+1
💡 Teacher’s Insight - Who Should Consider a Roth Conversion This Year?
1) People in a temporarily low-tax year
If this year’s taxable income is lower than usual (job loss, smaller paycheck, large tax deductions, widow/widower year), you may be in a lower marginal bracket, a prime time to convert some IRA dollars and “lock in” that lower rate. Investopedia walks through the bracket-timing concept clearly. Investopedia
2) Those expecting higher tax rates later (or large RMDs)
If you expect RMDs, rising Social Security taxation, or higher tax brackets in future years (or you’re a high-net-worth estate planning for heirs), it often makes sense to pay tax now and avoid larger future taxes. Kiplinger and Vanguard both note conversions help manage future taxable income and inheritance issues. Kiplinger+1
3) People who don’t need the converted money for 5 years
Remember the 5-year clock: converted amounts must generally stay in the Roth for five years before tax-free withdrawal of earnings rules apply (and each conversion has its own five-year rule). If you won’t need converted cash in the near term, conversions are cleaner. Investopedia and Fidelity detail the five-year considerations. Investopedia+1
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🔧 Quick How-To: Test This in 15 Minutes
Estimate this year’s taxable income (including Social Security, pensions, wages).
Pick a conversion amount that keeps you inside a comfortable marginal bracket (e.g., don’t jump from 12% to 22% unless you’re prepared). Investopedia shows examples of spreading conversions across years to limit bracket creep. Investopedia
Run the numbers with Fidelity’s Roth Conversion Calculator, it shows tax differences and scenarios side-by-side. Fidelity
Check IRS rules & reporting, conversions are reported with Form 8606; the IRS FAQs explain the filing steps and taxable treatment. IRS
⚠️ Important Rules & Cautions
You’ll pay tax on pre-tax amounts in the conversion year. That’s ordinary income for that tax year.
Conversions can affect Medicare premiums (IRMAA) and tax credits. A large conversion could temporarily increase Medicare Part B/D premiums, consider phasing conversions if you’re near an IRMAA threshold. (Kiplinger’s recent roundup explains these trade-offs.) Kiplinger
Form 8606 is essential. Keep good records, the IRS requires tracking of conversions and basis reporting. IRS
🔑 My One-Line Rule (What I Actually Do)
If my projected taxable income for the year places me at least one bracket lower than my expected retirement average, I convert up to the top of that lower bracket. It’s conservative, repeatable, and keeps my IRMAA risk manageable.
Want a copy of my bracket-fill worksheet? Reply YES and I’ll send a simple two-column calculator (fill in your numbers, see the tax impact).
📬 Question for You
Are you in a low-income year or expecting a future tax jump? Reply and tell me your situation, I’ll reply with the one question I’d ask your tax pro.
Warmly,
Sarah