Retirement’s Tax Window: When a Roth IRA Conversion May Make Sense

For many retirees, the years after leaving work but before required withdrawals begin can create a valuable tax-planning window. Income may be lower during this period, and thoughtful decisions around taxes and how your assets will support you over time can help make your retirement dreams reality.  

Traditional IRAs are among the most common retirement tools available, allowing investments to grow tax-deferred until withdrawal. Like many retirement accounts, traditional IRAs are subject to Required Minimum Distributions, or RMDs. These IRS-mandated withdrawals generally begin at age 73 for individuals born between 1951 and 1959, and at age 75 for those born later. Because these withdrawals are generally taxable and can significantly increase income later in retirement, many retirees choose to convert their traditional IRAs to a Roth IRA.

A Roth conversion involves transferring assets from a traditional IRA to a Roth IRA. The amount converted is generally taxable in the year of the conversion, but future qualified withdrawals from the Roth are tax-free.  

The Roth IRA Conversion Sweet Spot
Consider John and Mary, a married couple in their 60s. John retires at age 62 with a sizable traditional IRA. Mary, age 64, plans to retire at 65 and eventually roll her 401(k) into an IRA. Once both are retired, their household income may be lower than it was during their working years, potentially placing them in a relatively favorable tax bracket. By gradually converting portions of their IRA assets from traditional to Roth, they could reduce future RMDs and create a pool of tax-free assets they can access later if needed.  

This is exactly why the early retirement years can be a good time to explore Roth conversions. While traditional IRAs grow tax-deferred, larger account balances can also lead to larger RMDs. These distributions may increase taxable income, affect Medicare premiums, and reduce flexibility.

The impact may become more meaningful if one spouse passes away. While John and Mary file a joint tax return today, should one of that pass away, the surviving spouse will eventually file as a single taxpayer. As a result, the same IRA balance and RMD income may be taxed at higher rates.  

A Potential Retirement Planning Strategy

Many retirees choose to complete a series of partial Roth conversions over time. This approach may allow them to take advantage of lower-income years while maintaining greater control over their tax situation. And, because the original owner of a Roth IRA is not subject to lifetime RMDs, retirees have more flexibility in when and how they access their savings.

A Roth conversion is not the right strategy for everyone. Factors such as current and future tax rates, availability to pay conversion tax, Medicare considerations, charitable intentions, and estate planning goals should all be carefully evaluated.

However, for many people, the early years of retirement provide a unique planning opportunity. Taking a proactive approach during this window can help create greater tax flexibility, reduce future required distributions, and potentially improve long-term retirement outcomes.