Makes the argument that it’s financially advantageous to convert one’s IRAs to a Roth IRA in one lump sum, despite the upfront tax hit. And if you pay for the linked calculator, the alleged proof.
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I didn’t see the argument for a single lump sum. The example I saw involved a 5-year conversion window.
Most of what I have seen on the topic leads me to believe that Roth conversions are a balancing act. Key things to consider include:
- tax rates, both during the conversion window and when RMDs become significant.
- IRMAA, both conversion-driven and RMD driven.
- source of funds to both pay conversion taxes and living expenses.
- source of funds to pay for any potential long-term-care and/or expensive medical care.
- legacy goals, such as kids’ inheritance and/or charity.
- Account balances, particularly across traditional-style retirement accounts where RMDs can potentially become a high tax- and cost-driver.
Regards,
-Chuck
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I always use the conversion process and withhold the taxes at that point.
Convert 50K but net 40K into the Roth (or whatever your tax bracket will be). That way it has no impact on day-to-day stuff.
IRMAA is is the limiting factor for me.
Also convert as much as possible in preparation for the day when one spouse will be filing single.
This year I am waiting a bit to see what the new administration has planned for tax ‘reform’…
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I would also say think about Medicare and Social Security. Get it done before you reach 65.
Yes! I didn’t start until after my wife passed, and since I chose not to go to the next bracket that was pretty limiting. And now that I am taking RMDs, there really isn’t any headroom left.
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Not if you’re on ACA before you are eligible for Medicare. IRMAA premiums for the first couple of brackets are typically much lower than ACA premiums without subsidies, for even remotely comparable plans. Medicare has a low deductible and 20% co-insurance after the deductible is met. To get anything close to that in an ACA plan, you’re going to have to get at least a silver plan, and probably a gold plan. For a 64 year old (since they don’t price ACA for 65 year-olds) in my area, the lowest price silver plan is $1004/month and the lowest price gold plan is $1095/month. In comparison, the cost for Medicare B plus the lowest IRMAA bracket is $259/month. For Part D, you would pay your regular part D premium plus another $14/month. So unless your Part D premium is over $700/month, ACA coverage without subsidies is much more expensive than paying IRMAA.
Plus, in 2026, the ACA premium tax credits will go back to being $1 over 400% of FPL detailed-guidelines-2025.pdf, while the IRMAA bracket cliffs 2025 Medicare Parts A & B Premiums and Deductibles | CMS start at much higher income levels.
2025 comparison:
400% of FPL for 1 person household = $62,600
Lowest IRMAA bracket when filing Single = $106,000
400% of FPL for 2 person household = $84,600
Lowest IRMMA bracket when filing MFJ = $212,000
As you can see, especially for those MFJ, the IRMAA brackets are much less restrictive than the 400% of FPL cliff that ACA will use again starting in 2026. So doing Roth conversions while on Medicare will likely cost you less than if you do them on ACA.
As always, YMMV - so you need to analyze your own particular circumstances. But I’m looking forward to aging into Medicare, because my medical costs (premiums, co-pays, co-insurance, prescription drugs, etc.) will decrease from what I pay on ACA, even if I end up paying some IRMAA.
AJ
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Yep. Capture “free Obamacare” prior to age 65, delay SS to 70 (don’t want additional taxable income while you’re doing Roth Conversions), then target the size of the conversion to smooth out your tax bracket once RMD’s start (age 73 for me.) If a large RMD is going to put you in the next bracket, it makes sense to pay some taxes today in an effort to delay or reduce that.
intercst
I will also point out that even the article didn’t suggest that it was advantageous to convert all of one’s Traditional accounts. The example given was for someone who had $1.25MM to convert $1.1MM over the next 5 years, leaving $150k (plus any growth) in their T-IRA. But even that seems extreme to me, since even if that balance grows to $250k, the starting RMD is going to be less than $10k, while the standard deduction (which will also grow) is currently $15k. If you don’t fill up your entire standard deduction with ordinary income because the vast majority of your assets were converted to Roth accounts, you are being tax-inefficient.
And that also doesn’t account for the fact that it’s typically more effective to pay for long term care expenses using withdrawals from Traditional accounts, since LTC costs can be deducted. With LTC costs averaging in excess of $100k/year (although highly dependent on your local area), it seems like you would want to leave more than $150k - $250k in your T-IRA, instead of paying taxes early to convert it to Roth.
I will also point out that SS and Medicare are going to have to go through some type of reform process in the next 8 - 10 years. I would not be surprised if the new rules required that you count Roth distributions toward taxability of SS and IRMAA premiums, like the current rules require you to count tax-exempt interest. So you may not be avoiding all of the taxes that you expect to avoid by doing Roth conversions.
AJ
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Lots of smart folks on this site. Thank you all for your insights.
Lots of moving parts to the equation. The ACA subsidy is the largest piece for me, amounting to just over $42,000 last year for my family of four. Yikes.
I’ll take “Things I won’t be doing” for $1000, Alex.
Gross income puts us in the 35% bracket these days. Have $800k sitting in a rollover IRA. Uh, no thanks…
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