The Ins & Outs of Roth Conversions, Ep 184

Retirees usually think the tax decisions are done once they stop working. But the truth is, many are sitting on large pre-tax balances that can quietly lead to bigger tax bills later, especially when required minimum distributions kick in or a spouse passes away. It’s not just about saving money, it’s about how that money is taxed when you need to use it.

Roth conversions offer a way to shift those tax liabilities earlier, on your terms. I explain when that tradeoff makes sense and when it doesn’t, using clear, real-world examples. You’ll hear how a couple with zero current tax liability converted money without paying a dime, and why converting in a year with lower income or a temporarily down market might open the door to big savings. I’ll also break down why legacy plans, filing status changes, and Social Security taxation are key pieces of the puzzle.

You will want to hear this episode if you are interested in...

• (0:00) The ins & outs of Roth conversions.
• (1:55) The three tax buckets that shape retirement.
• (6:32) When conversions are a no-brainer (and when they’re not).
• (9:54) How your tax bracket and filing status change the math.
• (17:05) Roth as a better inheritance for your kids.
• (24:57) Clearing up common Roth misconceptions.

Know how much of your nest egg is sitting in the “tax me later” bucket

When I meet with new clients, one of the first things I check is how their savings are spread across tax types. A lot of folks don’t realize that the majority of their retirement funds are sitting in pre-tax accounts like 401(k)s and traditional IRAs, what I call the “tax me later” bucket.

That can create problems down the road, especially when required minimum distributions start, or when one spouse passes and the other moves into a higher tax bracket. Knowing your mix of pre-tax, Roth, and after-tax money gives you more control over your retirement income and more room to make smart moves now instead of reacting later.

Use low-income years and market dips to your advantage

Some of the best opportunities for Roth conversions come during years when your income is temporarily lower, like the early years of retirement before Social Security starts, or if you're working part-time.

Those windows let you move money into a Roth while paying a lower tax rate. Market dips can work in your favor, too. If your investments are temporarily down, you're paying taxes on a lower amount now, and the rebound happens inside a Roth, tax-free. It’s not about timing the market perfectly; no one can, but if you're already considering a conversion, those conditions can make a good idea even better.

Don’t ignore how taxes hit your spouse or your kids

I’ve had more of these conversations than I can count: one spouse passes away, and suddenly the surviving spouse is filing single, stuck with the same retirement income but a higher tax bill. Or adult kids inherit a traditional IRA while they’re in their peak earning years, and they’re forced to drain it within 10 years, getting crushed by taxes the whole way.

That’s why some couples I work with choose to pay taxes now at 12% or 22%, so their spouse or children aren’t stuck paying 24%, 32%, or more later. It’s not just about your tax rate today, it’s about who’s likely to pay and when.

Resources & People Mentioned

• 3 Steps to Retirement Planning