A Roth conversion is not automatically a good or bad idea. The useful question is whether this year’s income, spending, Medicare, Social Security, domicile, and survivor needs create a sensible conversion window.

“Should I convert part of my IRA to a Roth?” It is one of the most common questions we hear from people approaching or living in retirement. Usually, the next question is: “How much?”

Those are sensible questions. But they can lead to an answer that is far too simple.

A Roth conversion is not automatically a good idea because tax rates may rise. Nor is it automatically a bad idea because it creates a tax bill today. The right decision depends on your income, spending, investments, Social Security timing, Medicare premiums, charitable plans, state domicile, family circumstances and what may happen after one spouse dies.

After more than three decades of helping hundreds of families plan for retirement—and then adjust those plans as life unfolded—I have learned that the Roth question rarely begins with a percentage or a tax bracket.

It begins with your life.

What will you need from your portfolio this year? Has your employment income ended? Have you claimed Social Security? When will required minimum distributions (RMDs) begin? Could a conversion increase future Medicare premiums? Have you completed a move to Florida? What might the decision mean for a surviving spouse or the next generation?

These are not separate issues. They are connected parts of one retirement plan.

So the more useful question is not simply, “Should I convert?”

It is this:

“Does our retirement plan give us a sensible Roth-conversion window—and, if it does, how much should we convert this year in coordination with our CPA?”

KEY POINTS TO CONSIDER

• A Roth conversion generally means recognizing taxable income today in exchange for potentially tax-free qualified withdrawals later.
• The most attractive opportunity may occur during lower-income years after retirement but before Social Security and required minimum distributions begin.
• Converting too much in one year can increase your tax bracket, Medicare premiums and the taxable portion of Social Security benefits.
• Partial conversions spread over several years may provide more control than an all-at-once decision.
• The right amount should be coordinated with your spending needs, investment strategy, estate goals and the financial security of a surviving spouse.

What a Roth conversion actually does

A Roth conversion moves money from a traditional IRA into a Roth IRA. An eligible distribution from a workplace retirement plan may also be rolled into a Roth IRA, and some plans permit an in-plan Roth conversion. The rules of the particular plan matter.

The taxable portion of the conversion is generally added to your ordinary income for that year. If you have made nondeductible IRA contributions, part of the conversion may represent after-tax basis, and the calculation becomes more involved. The conversion is reported on your federal income-tax return.

Once the money is in the Roth IRA, it is governed by Roth rules. Qualified distributions are generally free from federal income tax, subject to the applicable requirements. A Roth IRA also has no required minimum distributions during the original owner’s lifetime.

There is an important tradeoff: you are choosing to recognize income and pay tax today in exchange for potentially more favorable flexibility later.

And the decision generally cannot be reversed. Roth conversions made in 2018 or later cannot be recharacterized back to a traditional IRA.

That is why a conversion should be planned before it is executed—not justified after the fact.

“Always convert” and “never convert” are both too simple

Roth conversions tend to invite strong opinions.

One side says tax rates will be higher in the future, so retirees should convert as much as possible now. The other side sees the immediate tax bill and concludes that converting cannot make sense.

Neither answer is a retirement plan.

A partial conversion may be helpful when current taxable income is temporarily lower than it is likely to be later, when a family has sufficient cash outside the IRA to meet spending and tax needs, or when reducing future traditional IRA balances could give the household more flexibility.

But a conversion may be less attractive in a year with substantial employment income, a business sale, a large capital gain or unusually high portfolio withdrawals. It may also be unwise if the money is needed for living expenses, if it would materially increase Medicare premiums, or if state domicile is unsettled.

Sometimes the thoughtful answer is to convert a portion. Sometimes it is to wait. Sometimes it is to convert nothing at all.

The purpose is not to “win” the Roth decision. It is to make a tax choice that supports the retirement you are actually trying to live.

Seven questions that can change the answer

1. Do you need the money for your life today?

Retirement planning begins with spending, not taxes.

If money from the IRA is needed for monthly living costs, a home project, a family gift, travel or an adequate cash reserve, using other funds to pay tax on a conversion may put unnecessary pressure on the plan.

Some families have sufficient cash, taxable investments or other income to fund their lifestyle and pay the conversion tax without weakening their reserves. That gives them an option—but an option is not an obligation.

Before deciding how much to convert, ask what those dollars need to accomplish for you this year and over the next several years.

How the tax is paid also matters. Using money from outside the IRA may allow more of the retirement account to reach the Roth. Withholding taxes from the IRA reduces the amount converted and can create additional complications, particularly for someone under age 59½. This is another detail to coordinate with a tax professional before moving the money.

2. Has employment income ended—and when will required distributions begin?

For many retirees, the years immediately after their final paycheck can look very different from the years that came before.

While you are earning a substantial income, a Roth conversion is generally added on top of that income. After employment income falls, there may be an opportunity to recognize some income intentionally before required minimum distributions begin.

Once RMDs apply, the required amount must generally come out first and cannot be converted. A conversion above that amount may still be considered, but it is a different calculation because the RMD has already used part of the year’s income capacity.

This period between employment and RMDs is often described as a Roth-conversion window. It can be—but only if the rest of the household’s circumstances also cooperate.

3. Have you claimed Social Security?

Social Security and Roth conversions should not be planned in separate rooms.

Depending on a household’s filing status and combined income, up to 85% of Social Security benefits may be included in taxable income. That does not mean the benefits are taxed at an 85% rate. It means that as other income rises, a larger portion of the benefit may become subject to the household’s applicable federal income-tax rate.

A Roth conversion raises income and may cause more Social Security benefits to become taxable. Before benefits begin, there may be more room for a conversion. After a claim, the same conversion amount can produce a different result.

That does not mean everyone should delay Social Security to create room for Roth conversions. Claiming is a life decision involving longevity, cash flow, investment risk, spousal benefits and personal preferences. It means only that the two decisions should be evaluated together.

4. What else could the conversion affect?

The federal income-tax bracket is only the beginning of the analysis.

A conversion increases adjusted gross income and can affect other parts of the return. Among the most important for retirees is Medicare’s income-related monthly adjustment amount, commonly called IRMAA.

Medicare generally uses tax-return information from two years earlier when determining whether higher-income beneficiaries will pay additional Part B and Part D premiums. A conversion made this year may therefore affect Medicare costs two years from now.

The net investment income tax also deserves attention. A Roth conversion is not itself net investment income. However, by increasing modified adjusted gross income, it may cause some of the household’s actual investment income to become subject to the separate 3.8% tax.

A larger conversion can also affect estimated-tax payments, deductions, charitable planning and other items on the return. The consequences depend on the complete tax picture, not just the conversion amount.

Edwards Asset Management does not replace your CPA or provide tax advice. Our role is to help connect the investment and retirement-planning decisions, model the tradeoffs and coordinate with your tax professional.

5. Is your Florida domicile clearly established?

Florida does not impose an individual state income tax on natural persons. That can make the timing of a conversion especially important for families relocating from a state that does impose an income tax.

But moving to Florida is more than changing a mailing address.

If the former state could still consider you a resident for part or all of the year, a conversion may create a state-tax issue that might not exist after Florida domicile is firmly established. The result depends on the former state’s law and the facts of the move.

For that reason, “Florida has no state income tax” should not become permission to convert immediately. A family should first work with its legal and tax advisers to put the balance of evidence clearly in favor of Florida residency and reduce the ties that point back to the former state.

Sometimes waiting until the move is complete and the domicile facts are stronger can be more valuable than rushing to convert in the transition year.

6. Would several smaller conversions be more useful than one large one?

A Roth conversion does not have to be all or nothing.

For a household with a significant traditional IRA balance, a series of partial conversions may provide more control than one large transaction. Spreading conversions across several years can allow the family to respond to changing income, tax laws, Medicare thresholds, markets, spending and health.

It also gives the plan room to pause.

One year may include the sale of a business or property. Another may bring an unusually large capital gain, major home expense, insurance event or charitable gift. A conversion amount that looked reasonable in January may no longer make sense by autumn.

This is why we generally view conversion planning as a year-by-year decision inside a multiyear strategy. We can model a range, but the actual amount should be reviewed using current information before the transaction is completed.

7. What would the decision mean for the surviving spouse—and the family?

This is often the most important question and one of the easiest to overlook.

While both spouses are living, a married couple will often file a joint return. After one spouse dies, the survivor may soon be filing as a single taxpayer. The surviving spouse may have less household income, but many expenses remain, and the applicable tax and Medicare thresholds can be less favorable for a single filer.

At the same time, the survivor may still own much of the same traditional IRA and eventually face many of the same required distributions.

Thoughtful conversions during joint-filing years may reduce the amount of tax-deferred money left for the survivor and create another source of retirement income. But that does not make conversion automatically correct. It means the survivor’s future cash flow, tax position, health needs and comfort managing the assets deserve a place in today’s decision.

The next generation may matter as well. If children or other beneficiaries are likely to inherit retirement accounts, their circumstances and the rules governing inherited accounts should be considered as part of the family’s broader estate and tax planning.

We often ask couples a simple question:

If one of you were no longer here, would this strategy still make life easier for the person left behind?

That question usually leads to a better conversation than “Which bracket should we fill?”

A conversion window is a set of circumstances—not a date on the calendar

The years after employment income ends and before Social Security and RMDs begin may offer unusual flexibility. But those years are not automatically low-income years, and the window does not stay open in exactly the same way.

A business sale, portfolio gain, real-estate transaction, inheritance, large withdrawal or change in tax law can alter the decision. So can an earlier-than-planned Social Security claim, a change in health or a year when the family maintains homes in two states.

Markets matter, too. A market decline may reduce the value of the assets being converted, allowing more shares to move for the same taxable value—but it may also coincide with a time when the family feels less financially secure. Valuation alone should not override cash-flow and risk considerations.

The conversion window is therefore not a single age or formula. It is a period when several household facts align:

• Current income is manageable.
• Spending and cash reserves are secure.
• The tax cost can be met without weakening the retirement plan.
• Social Security and RMD timing have been considered.
• Medicare and other tax effects have been measured.
• Domicile is clear.
• The decision improves flexibility for both spouses and, where relevant, the next generation.

When those facts change, the strategy should change with them.

A Roth conversion is one lever—not the entire tax strategy

A conversion sits alongside many other decisions: how much to spend, which account to draw from, when to claim Social Security, how to invest taxable and retirement accounts, when to realize gains or losses, whether charitable giving is part of the plan, and how assets should pass to a spouse or the next generation.

Focusing on only one lever can produce the wrong result.

A family might complete a conversion that appears attractive in isolation but then discover that the added income increased Medicare premiums or left too little liquidity for a major expense. Another family might avoid conversions for years to escape an immediate tax bill, only to face larger required distributions and less flexibility later.

Coordinated planning does not promise the lowest possible lifetime tax. No one can know future tax laws, markets, longevity or family circumstances with certainty. What it can do is help a family make

a well-informed decision using the facts available today, test the decision under different assumptions and revisit it as those facts change.

Start with the retirement life you want

We have helped hundreds of families work through Roth-conversion decisions. Some converted a portion of their IRAs over several years. Some waited for employment income to end or for Florida domicile to become clearer. Others converted nothing because their spending needs, tax circumstances or family priorities pointed in a different direction.

The strongest plans did not all arrive at the same answer.

What they had in common was coordination.

The conversion was considered alongside the family’s lifestyle, income, investments, taxes, Medicare premiums, charitable intentions, health, longevity and survivor needs. The plan was then reviewed as markets moved and life changed.

Some factors are within our control: how much we spend, how we invest, when we retire, when we claim Social Security and how we draw from our accounts. Others are not: markets, inflation, tax laws, health and how long we may live.

A thoughtful retirement plan prepares for both.

The goal is not to make the largest possible Roth conversion. It is to use the accounts you have built in a way that helps you and your family live well, worry less and make the most of the years ahead.

How Edwards Asset Management can help

We do not begin with a predetermined conversion amount or a bracket we believe every retiree should fill.

We begin with the life you want your assets to support. Our CFP® retirement-planning specialists can then model how different conversion amounts may interact with:

• Projected retirement spending and cash reserves
• Social Security timing for both spouses
• Pension and other dependable income
• Portfolio withdrawals and market risk
• Required minimum distributions
• Federal income taxes and the rest of the tax return
• Medicare income-related premiums
• Florida domicile for families who have relocated or plan to relocate
• The future income and filing status of a surviving spouse
• Charitable and multigenerational goals

Wealth-planning technology cannot predict the future. It can, however, help families see tradeoffs, compare reasonable scenarios and understand how a decision in one part of the plan may affect several others.

Just as important, the analysis should not be completed once and placed on a shelf. We help maintain and update the retirement plan as spending, markets, inflation, tax laws, health and family circumstances change.

Our investment-management team can coordinate the portfolio with that plan. When appropriate and consistent with the client’s objectives, we can help manage cash reserves and distributions and use tax-aware techniques involving the timing of withdrawals and the realization of gains or losses. That coordination can provide flexibility when the plan calls for intentionally realizing more income in one year or seeking to defer income in another.

We work alongside the family’s tax and legal advisers. Edwards Asset Management and Wells Fargo Advisors Financial Network, LLC do not provide tax or legal advice. The final conversion decision should be reviewed with a qualified tax professional.

The objective is not to minimize this year’s tax bill at the expense of the rest of retirement. It is to help your income, investments, taxes and family priorities work together.

If you are wondering whether a Roth-conversion window exists for you, bring your latest tax return, retirement-account statements and Social Security estimates. We can help map the questions that should be answered with your CPA.

There may not be one perfect conversion amount. But there can be a thoughtful process—and a plan designed around the retirement you worked hard to create.

To request a complimentary introductory consultation about your retirement plan, contact Edwards Asset Management.

Edwards Asset Management Naples, Florida · Fort Lauderdale, Florida · Albany, New York 239-264-1000 · EdwardsAsset.com