The Roth Conversion Ladder

A ticking clock most retirees don't see

For many successful professionals, decades of diligent 401(k) contributions create an impressive retirement balance. But there's a challenge embedded in that success: every dollar in a traditional IRA or 401(k) is a future tax liability.

When Required Minimum Distributions begin at age 73, the IRS determines how much you must withdraw each year — and those withdrawals are taxed as ordinary income. For retirees with large pre-tax balances, RMDs can push them into higher brackets, trigger Medicare IRMAA surcharges, increase Social Security taxation, and reduce the net inheritance available to their children.

However, there is often a window of opportunity — the years between retirement and age 73 — when income may be lower and tax brackets more favorable. This window may allow for strategic Roth conversions at potentially lower tax rates than those that could apply once RMDs begin.

Client profile — Robert & Susan Graham*

What happens without a conversion strategy

If the Grahams take no action and simply allow their IRA to grow until RMDs begin at age 73, several potential challenges could emerge, depending on market performance and tax law changes:

• Larger forced distributions. If the IRA grows at a hypothetical 6% annual rate, the balance at age 73 could approach $5 million or more. First-year RMDs on a $5M balance would be approximately $188,000 — on top of Social Security income. This could push the Grahams into the 32% or higher bracket.
• Medicare IRMAA surcharges. MAGI above $212,000 (MFJ, 2025 threshold) triggers income-related adjustments to Medicare premiums. The Grahams could face additional Medicare costs of several thousand dollars per year if their combined RMD and Social Security income exceeds these levels.
• Social Security taxation. Up to 85% of Social Security benefits become taxable when combined income exceeds $44,000 (MFJ). Large RMDs would likely cause maximum taxation of their benefits.
• Reduced inheritance flexibility. Under the SECURE Act, most non-spouse beneficiaries must fully distribute inherited IRA assets within 10 years — all taxed as ordinary income at the beneficiary's rate. A large pre-tax IRA creates a significant tax burden for heirs.

Note: The projections above assume hypothetical growth rates and current tax law. Actual RMD amounts, tax brackets, and IRMAA thresholds are subject to change. Congress may modify tax rates, RMD rules, or Medicare premium structures at any time.

A systematic approach to Roth conversions

The core concept: during the 10-year window between Robert's retirement at age 63 and the onset of RMDs at age 73, the Grahams may benefit from converting a portion of their traditional IRA to Roth each year — targeting amounts that fill the 24% federal tax bracket without spilling significantly into the 32% bracket. The goal is to voluntarily pay taxes now at a potentially lower rate rather than being forced to pay taxes later at what could be a higher rate.

Shifting the balance — year by year

The following illustrates a hypothetical progression of the Grahams' retirement assets from predominantly pre-tax to a more balanced mix, based on assumed annual conversions of approximately $175,000 and a hypothetical 6% growth rate. Actual results would vary.

Assumes ~$175K annual conversion, 6% hypothetical growth rate, no withdrawals until age 70+. Roth IRA withdrawals are tax-free and penalty-free provided the account has been held for at least 5 years and the account holder is age 59½ or older. Hypothetical growth rates are not guaranteed.

How Roth conversions may create ripple effects

The primary benefit of Roth conversions is the potential to pay taxes at a lower rate today versus a potentially higher rate in the future. But the downstream effects — while not guaranteed — can compound across multiple areas of a retirement plan:

• Smaller future RMDs. Each dollar converted to Roth reduces the pre-tax IRA balance subject to future RMDs. Roth IRAs have no RMDs for the original owner under current law (SECURE 2.0).
• Medicare premium management. Lower RMDs may help keep MAGI below IRMAA thresholds. Based on 2025 thresholds, the difference between the base premium and the highest IRMAA bracket can exceed $9,000 per person annually.
• Social Security tax efficiency. Roth withdrawals do not count toward the income calculation that determines how much of Social Security is taxable — currently up to 85% under federal law.
• Tax-efficient inheritance. Inherited Roth IRAs are distributed tax-free to beneficiaries (subject to the 10-year rule). Inherited traditional IRAs are taxed as ordinary income.

Estimated tax comparison — two scenarios

The following table compares the estimated cumulative lifetime taxes under two hypothetical scenarios. These figures are illustrative only and depend on assumed growth rates, tax brackets, life expectancy, and current tax law remaining unchanged — none of which can be guaranteed.

Assumptions: 6% hypothetical growth rate; current 2025 tax brackets held constant; life expectancy of age 90; Social Security claimed at age 70; heirs in the 32% marginal bracket; no changes to IRMAA thresholds or RMD rules. Actual results may be materially different. This is a hypothetical illustration and does not represent any actual client outcome.

Why the window matters

The years between retirement and age 73 may represent a unique opportunity — a period when earned income has stopped, Social Security hasn't begun, and RMDs aren't yet required. For many retirees, these could be the lowest-income years of their adult life.

This window doesn't last forever. Once RMDs begin, they add to taxable income and may reduce the benefit of further conversions. And if Congress raises tax rates in the future — which is possible given the scheduled expiration of the 2017 Tax Cuts and Jobs Act provisions — the opportunity to convert at current rates becomes even more valuable in hindsight. Planning ahead — not reacting to a tax bill — is the difference between a retirement burdened by forced distributions and one with the flexibility to give, spend, and leave a legacy on your terms.

This strategy may be worth exploring if you…

• Have a significant pre-tax retirement balance ($1M+) and are concerned about the tax impact of future Required Minimum Distributions.
• Are between ages 55 and 73 — ideally with several years of lower income before RMDs begin.
• Have other assets to fund living expenses during the conversion period, so you don't need to withdraw from the IRA for spending.
• Want to reduce the tax burden on your heirs — recognizing that inherited traditional IRAs must be distributed (and taxed) within 10 years.
• Are willing to pay taxes now for potential tax flexibility later — understanding that this involves a trade-off with no guaranteed outcome.
• Value proactive planning over reactive decisions.