Goldilocks Period for Partial Roth Conversions

Goldilocks Period for Partial Roth Conversions

| September 01, 2020

Often when people retire, they will drop one or two tax brackets because they no longer have any earned income.  For most people, retirement occurs in their 60s so this is when their income and tax bracket usually go down.  Maybe they were in the 22% tax bracket when they were working, but now fall into a 12% tax bracket.  But once they reach age 70 and older, between Social Security and Required Minimum Distributions on their IRAs starting at age 72, often they go right back up to a 22% bracket. 


A tax strategy you can use during those years of lower income, is to convert enough traditional IRA to a Roth IRA to use up the rest of the 12% tax bracket.  That way you pay lower taxes on that money now vs. paying higher taxes on it later when you go back up to a higher tax bracket.

For example, let’s say a married couple filing a joint return retired with $50,000 of taxable income which meant they were in the 12% tax bracket. That bracket goes all the way up to $80,250 (in 2020) before you go into the 22% tax bracket.  That means they could convert $30,250 to a Roth IRA and only pay 12% taxes on it.

Now, that money is in a Roth IRA, and it grows tax free and comes out tax free later.  Also, you don’t have to take RMDs from Roth IRAs.  If they hadn’t done this, there’s a good chance they would have to take it out later in life when they’re back up to a 22% tax bracket. If this turned out to be true, in this example it saved them 10% in taxes on that $30,250 by converting it in the lower 12% bracket, which is $3,025.

Even though we’re using a simple example, in the real world how much you should convert to a Roth is more complicated. For example, if you currently have low income thus causing very little of your Social Security to be taxed, converting too much of your traditional IRA to a Roth IRA in one year may trigger too much extra tax on your Social Security and reduce the value of the Roth conversion.


That’s why we actually run a Roth conversion analysis on our software to see precisely how much of your IRA to convert to a Roth in one year to maximize your tax efficiency.


The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.