Commentary · Tax Strategy
You Have a Window. Most People Notice It After It Closes.
Written by the William Allan team · Reviewed by Jason Crawshaw, CPA ·
There is a stretch of years that does not look like a decision.
Work has stopped, or is about to. Social Security may or may not have started. The pre-tax accounts are still sitting there, doing what they have always done. Required withdrawals have not begun. Nothing is forcing a move this year, which is exactly why the year tends to pass without one.
That stretch is the conversion window. Not a product. Not a trick. A period when a household's taxable income is often lower than it was in the working years, and lower than it will be once the IRS starts requiring money out of those accounts every December.
What a Roth Conversion Actually Is
It is taking money that has not been taxed yet, moving it into a Roth, and paying the tax now, in a year you choose, instead of later, in a year the IRS chooses.
The later year is not theoretical. Required minimum distributions from traditional IRAs and most workplace plans are calculated from the prior year-end balance. Larger accounts produce larger required withdrawals. Those withdrawals are ordinary income. They stack on Social Security, pensions, and whatever else the household already has, and they continue for the rest of the owner's life.
A conversion does not avoid tax. It relocates it.
When the Window Actually Is
For IRA owners, the first required minimum distribution is generally due by April 1 of the year after you reach the applicable age. That age depends on when you were born. Under current law and Treasury regulations, it is 73 for many people now in or near retirement, and rises to 75 for people who reach age 74 after 2032.
The useful part is not the birthday. It is the years in front of it.
Once required withdrawals start, they consume bracket space whether you wanted them or not. The years before that happens are often the last stretch when the household can decide how much pre-tax money to recognize, instead of having the amount handed to them.
Missing a year does not feel like missing a year. It feels like nothing happened. That is the problem.
The Part That Gets Skipped
A conversion raises taxable income in the year you do it. That can be fine. It can also be expensive in ways that do not show up on the conversion form.
Medicare premiums for Part B and Part D generally use tax information from two years earlier. Income this year can change premiums later. The surcharge works in tiers, not as a gradual slope. Crossing a threshold by a little can trigger the full adjustment for the next tier.
A conversion can also pull more of a Social Security benefit into tax in the same year. Households that have already claimed often discover the real rate on the conversion is higher than the bracket they thought they were filling.
None of this means conversions are a bad idea. It means the number that looks clean in isolation is not the number that lands.
The Questions That Actually Decide It
What will your taxable income look like this year, without a conversion. Not a guess. The year you are actually in.
What will required withdrawals look like later if the pre-tax accounts keep doing what they are doing. Directionally. You do not need a precise forecast of the market to see whether the balance is large enough to matter.
What else is happening in the same year. A sale. An inheritance. A last W-2. A spouse claiming Social Security. Conversions that look reasonable in a quiet year become crowded in a loud one.
Whether you can pay the tax from money that is already after-tax. Using the converted dollars to pay the tax shrinks the thing you were trying to build.
Whether you will be on Medicare, or about to be, and whether this year's income will still be echoing when those premiums are set.
If you cannot answer those, you are not behind. You are in the position most households are in. The window is still a window. It is just not a reason to act on a headline.
What We Would Tell a Friend
If a friend asked over dinner, without the software, the honest answer would go something like this.
If you are in the years after work and before required withdrawals, and you have a meaningful pre-tax balance, it is worth knowing whether this year is a quiet one or a crowded one. A conversion in a quiet year can be one of the more useful things a household does. A conversion in a crowded year can buy a tax bill and a Medicare surprise for the privilege of feeling proactive.
If you are still earning, the window may not be open yet. That is information, not a failure.
If required withdrawals have already started, the decision is different, not gone. It is usually smaller, and it has to live around an amount you no longer control.
And if your required minimum distribution age is 75 under current law, you may have more calendar than people a few years older than you. More calendar is only useful if a year of it is actually used.
That picture, laid out for this year, is an afternoon of work. It is the sort of thing worth doing with someone whose job is to lay it out straight.
Informational purposes only. Not investment, tax, or legal advice. Roth conversions are taxable in the year of conversion and generally cannot be recharacterized. Required minimum distribution ages and Medicare premium rules depend on individual circumstances and current law, which can change. William Allan does not provide tax advice. Consult a qualified tax professional regarding your situation. William Allan is an investment adviser registered with the SEC; registration does not imply any specific level of skill or training. All investing involves risk, including possible loss of principal.