Best Timing for Roth Conversions

Roth conversions can be powerful but only if you get the timing right. In this video, financial advisor Graham Ewing walks through the best times for converting your traditional IRA to a Roth, including the “gap years” between retirement and Social Security, opportunities during market downturns, and when to avoid conversions altogether. He covers:

• IRMAA concerns 
• Social Security taxation
• Why smaller strategic conversions over time often beat one big move.

If you have any questions about Roth conversions or your financial plan call (410) 823-7283 or schedule a time to talk through our website.

Transcript 

You’ve probably heard about Roth conversions and have maybe even thought about doing one, but most people focus on the wrong question. They’re asking if they should convert, when what really matters is when. 

If you get the timing right, you can potentially save thousands in taxes. If you get it wrong, you might end up paying much more than you need to. 

I’m Graham Ewing from Financial Consulate, and today we’re going to talk about when Roth conversions make the most sense and when they absolutely do not.

What Is a Roth Conversion? Understanding the Basics

Let’s start with what a Roth conversion actually is. 

You’re taking money from a pre-tax retirement account, such as your IRA or 401(k), and moving it into a Roth IRA. When you do this, you pay taxes in that converted amount at your current tax rate, but once it’s in the Roth, it grows tax-free and comes out tax-free in retirement. Now, if you convert at the wrong time, you could pay more in taxes than you needed to, or worse, trigger a chain reaction that affects your Medicare premiums, Social Security taxation, or pushes you into a higher tax bracket. 

So when you convert matters just as much as whether you convert.

The Best Time for Roth Conversions: Using Gap Years Strategically

The best time for most people to do Roth conversions is what we call the “gap years,” that window between when you retire and when you start taking Social Security. Let’s say you retire at 62. You’re not taking Social Security yet, and you don’t have required minimum distributions since those don’t start until 73 or 75 (depending on what year you were born). Plus, your income is low because you’re no longer working. You can convert chunks of your into a Roth and stay in lower tax brackets without all that extra income from Social Security or RMDs pushing you into higher brackets. You’re paying less in taxes now than you likely will later.

Real-Life Example of Roth Conversion Timing in Retirement

We see this all the time. A couple retires, and for those five to eight years before they claim Social Security or hit RMD age, they strategically convert pieces of their IRA. By the time they’re 70, they’ve moved hundreds of thousands into a Roth and paid much less in taxes than if they had waited.

Roth Conversions During Market Downturns: A Strategic Opportunity

Another great time to convert to a Roth IRA is during a down market. When the market drops, your IRA balance drops too. If you have $100,000 in your IRA and it falls to $80,000, you can convert that $80,000, pay taxes on the lower amount, and when the market recovers, all that growth happens inside the Roth tax-free. 

We saw this in 2022 when markets were significantly down. Clients who converted that year essentially got a discount on their tax bill and captured the recovery tax-free. That doesn’t mean you should wait around hoping for a crash, but if you’re already planning conversions, markets happen to dip, that’s a good time to act.

When Roth Conversions May Not Make Sense

Now let’s talk about when Roth conversions don’t make sense. If you’re within a year or two of turning 65, you need to be careful. Why? Because the income you create from a conversion counts toward IRMA, which are those Medicare premium surcharges. If you convert too much, you could end up paying hundreds of dollars more per month for Medicare. That can wipe out the tax benefit you were aiming for.

How Roth Conversions Impact Medicare and Social Security Taxes

The same thing applies if you’re already taking Social Security. The income from a conversion can make more of your Social Security taxable. You’re not just paying taxes on the conversion itself, you’re paying taxes on Social Security income that would have been tax-free otherwise. 

And if you’re in your peak earning years, still working, and already in a high tax bracket, conversions probably don’t make sense. You’re paying taxes at today’s high rate when you could potentially convert later at a lower rate in retirement.

A Smarter Roth Conversion Strategy: Partial Conversions Over Time

Roth conversions aren’t an all-or-nothing decision. You don’t have to convert your entire IRA in one year. In fact, you probably shouldn’t. The goal is to do smaller conversions over multiple years, filling up tax brackets strategically, avoiding those Medicare surcharges, and keeping your tax bill manageable. This is where working with someone who understands both the tax side and the financial planning side matters. Because a Roth conversion isn’t just a tax move, it affects your entire retirement picture.

Key Takeaway: When Is the Best Time for a Roth Conversion?

So, when is the best time for a Roth conversion? It depends on your income, your tax bracket, where you are in your career, and what’s happening in the markets. 

But if there’s one thing I want you to take away, it’s this: the window between retirement and Social Security is usually your best shot. 

If you’re thinking about Roth conversions and want to run the numbers for your specific situation, reach out. We’ll walk through what makes sense for you. Thanks for watching.