You have spent years contributing to a 401(k) or an IRA. For a lot of that time, nobody suggested there might come a year when moving some of that money into a Roth account makes more sense than leaving it alone. That question does not come up while you are working. It comes up in the years around retirement, and the window to act on it is narrower than it looks.
Converting Is Not the Same as Contributing
A Roth contribution is money you add directly to a Roth account, and it is capped by annual limits. A Roth conversion is different. It is money you move from a traditional IRA or 401(k), where it has been growing tax-deferred, into a Roth account, where it grows tax-free going forward. You pay tax on the amount you convert in the year you convert it. After that, the money and its future growth are yours to withdraw without owing anything further.
There is no dollar limit on how much you can convert in a year. That is not a small detail. It means the conversion decision is not about hitting a cap. It is about deciding how much of your traditional balance makes sense to convert given where your income and tax bracket sit right now, this year, compared to where they are likely to sit later.
The Bracket You’re Already In
A lot of our clients land somewhere between $8,000 and $12,000 a month in retirement income, which puts them squarely in the 12% federal tax bracket. Your actual tax bracket depends on your filing status, the sources and taxability of your income, your deductions, and other individual circumstances, so this range will not apply the same way to everyone. The next bracket up is a meaningful jump. Income taxed at 12% moves to being taxed at 22% once you cross that line, nearly doubling the rate on every dollar above it.
When someone in the 12% bracket has a large IRA, the strategy is often to intentionally use the room left in that bracket rather than let it go unused.
→ Withdraw and spend some of it.
→ Convert some of it to Roth.
→ Do some combination of both.
Either way, the goal is the same: take full advantage of the bracket you are in before Social Security or required minimum distributions push you into a higher one automatically.
Why We Wait Until Fall to Decide
Tax planning has to happen every year, not once for the next ten. Laws change. Income changes. And the timing within the year matters just as much as the yearly decision itself.
If a conversion happens early in the year and an unexpected capital gain shows up later, from selling a home or an investment, it can push that conversion into a higher bracket than intended. If the market drops after a conversion is made, you can end up having paid tax on a value the investment no longer holds. Waiting until closer to year-end, once a lot of the picture for the year is clear, lets us convert the right amount instead of guessing early and hoping nothing changes.
A Decision Inside a Larger Plan, Not a One-Time Move
A Roth conversion is not something to decide in isolation. It is one piece of a retirement income plan that also accounts for Social Security timing, required minimum distributions down the road, and what you eventually want to leave behind. Within the Safe Harbor Retirement System, this is where tax planning lives: not as a once-a-year scramble, but as a recurring decision made with the full picture in view.
The years right around retirement, before Social Security and RMDs are both in motion, are often the only time your tax bracket is entirely within your control. That control does not last forever. If you have a significant IRA or 401(k) balance and you are within a few years of retirement in either direction, this is worth a real conversation before the year closes out.
If you would like to talk through whether a Roth conversion fits your plan this year, reach out to schedule a year-end Safe Harbor review. We will walk through the numbers together.
Give us a call 732-364-2045 or contact us to schedule a year-end Financial review
This material is intended for informational/educational purposes only and should not be construed as investment/tax advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Roth IRA conversions may have tax consequences and are not appropriate for all investors; consult a qualified tax professional regarding your individual circumstances.