Evaluate the tax cost today against potential flexibility tomorrow
Roth Conversion Planning
A Roth conversion can create taxable income now in exchange for moving retirement assets into a Roth account. The important question is not whether conversions are universally good—it is whether a specific amount and year fit your retirement plan.
Fairchild Capital can model tax-sensitive planning choices. Individual tax treatment should be confirmed with a qualified tax professional.
Start with the mechanics
What is a Roth conversion?
A Roth conversion moves eligible assets from a pre-tax retirement account into a Roth account. The taxable portion is generally included in income for the year of the conversion.
The conversion does not create a deduction, and it is different from making an annual Roth IRA contribution. Income limits that may restrict direct Roth IRA contributions do not necessarily prevent a conversion, although other rules, reporting requirements and account-specific restrictions can apply.
After the conversion, qualified Roth IRA distributions can be federal-income-tax-free, and Roth IRA owners generally are not required to take lifetime distributions. Those potential benefits must be weighed against the immediate tax cost and other consequences of increasing income in the conversion year.
The short answer
A Roth conversion is not automatically a tax-saving move. It is a decision to pay tax under today’s circumstances in pursuit of potential future tax flexibility. The analysis depends on the amount converted, current and future tax conditions, time horizon and the rest of the retirement plan.
Potential planning windows
When might a Roth conversion be worth evaluating?
After work ends
The years after a final paycheck but before Social Security or required distributions may create a different taxable-income range.
After account values decline
Converting depressed assets may move more shares at a lower current value, but market recovery and future tax outcomes remain uncertain.
Before RMDs begin
Partial conversions may reduce future tax-deferred balances, but the current tax cost must be compared with projected benefits and other uses of the money.
Before a filing-status change
A surviving spouse may eventually file under different tax brackets. Conversion analysis can include survivor income, spending and estate priorities without assuming future law.
Lower income can create an opportunity to evaluate a conversion, but capital gains, Social Security taxation, healthcare subsidies, deductions, state taxes and Medicare premiums can change the result.
“Should I convert?” is incomplete without “How much, when and why?”
Fairchild Capital can help compare conversion scenarios within the rest of your retirement plan.
Look beyond the conversion tax
What should Roth conversion planning consider?
Taxable income
Estimate the taxable portion of the conversion and how it may interact with ordinary-income brackets, deductions, credits and other income expected during the year.
Medicare premiums
A conversion can increase modified adjusted gross income used for income-related Medicare Part B and Part D adjustments. The premium effect may occur later because Medicare generally uses an earlier tax return.
Social Security
Additional income may cause a larger portion of Social Security benefits to become federally taxable. The conversion should be evaluated with benefits and other income rather than in isolation.
Health coverage
For retirees not yet on Medicare, additional income may affect eligibility for income-based health-insurance assistance. Current marketplace and tax rules should be verified before implementation.
State taxes
The state tax cost can depend on residence and each state’s treatment of retirement income and conversions. A planned move may materially change the comparison.
Tax payment
Paying the tax from funds outside the retirement account may preserve more converted assets, but it also uses cash that could support spending, investing or emergencies.
Time horizon
The potential benefit generally needs time to offset the upfront cost. Age, health, investment horizon, beneficiary goals and likely use of the assets all matter.
IRA basis
Nondeductible IRA contributions and other after-tax basis can complicate the taxable calculation. Form 8606 history and all relevant IRA balances should be reviewed with a tax professional.
Conversions do not have to be all-or-nothing
How much should you convert?
A full conversion can create a large tax bill and unintended income-related costs. For some households, a series of partial conversions may provide more control. For others, converting little or nothing may be reasonable.
The analysis can compare several amounts instead of targeting a tax bracket without context. One scenario might stay within a selected ordinary-income range. Another might intentionally cross that range because the long-term comparison still appears favorable. A third may reduce or avoid a conversion because of Medicare, healthcare, cash-flow or estate considerations.
Project income without a conversion
Estimate wages, pensions, Social Security, interest, dividends, gains, withdrawals and other expected income.
Model several conversion amounts
Compare the estimated federal and state effects, including relevant interactions rather than only the marginal bracket.
Compare future scenarios
Evaluate potential future withdrawals, required distributions, survivor circumstances and possible beneficiary goals using clearly stated assumptions.
Confirm before executing
Coordinate the proposed amount and tax reporting with a qualified tax professional and the account custodian before year-end deadlines.
Conversion decisions should sit inside a broader retirement tax plan and retirement income strategy.
The largest conversion is not necessarily the best conversion.
The goal is an amount that supports the household’s broader plan after considering both immediate and potential future effects.
Common planning errors
What can go wrong with a Roth conversion?
Looking at one rate
Comparing only today’s marginal bracket with an assumed future bracket can overlook Medicare, Social Security, capital gains, state taxes and deductions.
Ignoring cash flow
A conversion may look favorable on paper but create a tax bill that competes with near-term spending, reserves or other priorities.
Converting the RMD
A required minimum distribution is not eligible for rollover or conversion. When an RMD applies, the required amount generally must be handled before other eligible dollars are converted.
Waiting until year-end
Custodian processing, tax estimates and incomplete information can make rushed implementation difficult. Start the analysis early enough to coordinate the details.
Assuming it can be undone
Conversions completed in 2018 or later generally cannot be recharacterized back to a traditional IRA. Confirm the amount and consequences before acting.
A coordinated planning process
How Fairchild Capital can help evaluate a Roth conversion
Understand the retirement plan
Review spending, income sources, accounts, investments, healthcare and family priorities before isolating a tax strategy.
Identify possible planning years
Map changes in employment income, Social Security, pensions and required distributions to locate periods worth closer analysis.
Compare amounts and tradeoffs
Model reasonable conversion amounts and explain the assumptions, estimated costs, potential benefits and important limitations.
Coordinate and review
Confirm individual tax treatment with a qualified tax professional, coordinate execution and update the plan as circumstances or laws change.
Related Fairchild Capital resources
Explore retirement planning, tax planning in retirement, retirement income planning and planning for Oregon PERS members.
Common questions
Roth conversion planning FAQs
What is a Roth conversion?
A Roth conversion moves eligible assets from a pre-tax retirement account into a Roth account. The taxable portion is generally included in income for the conversion year. Future qualified Roth distributions can be federal-income-tax-free.
Is a Roth conversion the same as a Roth contribution?
No. A contribution adds new money and is subject to annual contribution and eligibility rules. A conversion moves existing eligible retirement assets. Different rules, taxes and reporting requirements apply.
When is the best time to complete a Roth conversion?
There is no universally best time. Years with lower taxable income, the period before required distributions or a market decline may be worth evaluating. Medicare premiums, healthcare assistance, Social Security, state taxes and cash needs can change the answer.
How much should I convert to a Roth IRA?
The amount should be based on a household-specific analysis. Compare multiple conversion amounts, the current tax cost, income-related effects, future withdrawal expectations and available cash rather than relying on one bracket or rule of thumb.
Can a Roth conversion increase Medicare premiums?
Yes. A conversion can increase modified adjusted gross income used to determine Medicare Part B and Part D income-related adjustments. Because Medicare generally uses an earlier tax return, the premium effect may occur later.
Can I convert my required minimum distribution?
No. A required minimum distribution is not eligible for rollover or conversion. If an RMD applies, it generally must be satisfied before converting other eligible retirement-account dollars.
Can I reverse a Roth conversion?
Conversions completed in 2018 or later generally cannot be recharacterized back to a traditional IRA. Confirm current rules, the conversion amount and individual tax consequences before implementation.
Does Fairchild Capital provide tax advice?
Fairchild Capital can incorporate tax considerations and scenario analysis into financial planning. Individualized tax advice, tax-return preparation and confirmation of tax treatment should be handled or confirmed by a qualified tax professional.
Rules can change. Confirm current information using the IRS Roth IRA overview, IRS Publication 590-A, IRS RMD guidance and Medicare cost information.
Take the next step
Find out whether a Roth conversion belongs in your retirement plan.
Schedule an introductory conversation about the decisions ahead and whether Fairchild Capital may be the right fit.
