Many people retire before required minimum distributions begin. Those years can be a tax planning sweet spot. In many cases, wages have decreased, Social Security may not have started, and Required Minimum Distributions (RMDs) have not yet been enforced. That is your chance to convert traditional retirement dollars to Roth with precision, controlling what bracket you fill and reducing future tax risk. This article outlines the core rules that apply during this window and provides a framework for deciding how much to convert each year.
The Baseline: How RMDs Work Now
Account owners must begin required minimum distributions for traditional IRAs and many employer plans when they reach age 73 (75 for those born after 1960). The original owner of a Roth IRA does not have lifetime RMDs. In addition, designated Roth accounts in employer plans are not subject to lifetime RMDs for the owner. Those statements are the foundation for why pre-RMD Roth conversions can be powerful.
Once RMDs begin, the required portion for that year is not eligible for rollover or conversion. You must take the RMD first. Amounts taken in that calendar year are treated as RMDs until the obligation is satisfied, and RMDs are excluded from the set of distributions you are allowed to roll over.
Why the pre-RMD window matters
When wages decline or stop and before RMDs start, many families find themselves in lower marginal brackets than they will face later when Social Security, pensions, and RMDs begin to factor in. Converting during that period lets you swap a slice of pretax dollars for Roth dollars at known and often favorable rates. Because Roth IRA owners do not face lifetime RMDs, you also reduce future forced income by shrinking your pretax base.
The clocks still matter in your 50’s & 60’s
The five-year qualified distribution clock for Roth IRAs begins with the first tax year for which you had any Roth IRA funds for your benefit. If you have not already established a Roth IRA, consider opening one and making a small contribution to get the clock started. After age 59 1/2, the 10% penalty on early distributions does not apply, but the qualified distribution clock still applies to earnings.
If you also use a designated Roth account in a workplace plan, remember that a workplace plan Roth has its own five-year period of participation, which is separate from the IRA clock. A rollover from a plan Roth to a Roth IRA does not carry the plan’s clock to the IRA.
How much to convert each year
- Fill to the top of a chosen marginal bracket
This keeps current-year tax predictable and concentrates the value of your Roth dollars in years when you can convert at an attractive rate.
- Coordinate with Medicare’s income-related monthly adjustment amount (IRMAA)
IRMAA surcharges for Medicare Parts B and D are based on modified adjusted gross income from two years prior, using IRS data. If you will be 65 in 2027, the agency typically looks at your 2025 return. This is not a reason to avoid converting, but it is a reason to convert deliberately.
- Blend bracket and IRMAA targets
Some years, you may fill a bracket just below an IRMAA tier. In other years, you may accept an IRMAA step up to convert more when markets are down and valuations are attractive. The point is to decide on purpose, not by accident.
Direct is better
Conversions from a traditional IRA to a Roth IRA are cleanest as direct trustee-to-trustee moves. For employer plans, direct in-plan Roth rollovers or direct rollovers to a Roth IRA avoid the twenty percent withholding that applies when a plan pays you first. The IRS rollover page lists RMDs as not eligible for rollover, which is another reason to follow the correct steps in the right order once RMDs begin.
Form 8606 & the pro-rata rule
If you have a basis in any traditional IRA from nondeductible contributions or after-tax rollovers, every conversion from any traditional, SEP, or SIMPLE IRA is partly taxable and partly basis driven, in proportion to the value of all those IRAs combined. The instructions for Form 8606 walk through the aggregation and explain where to report the basis and conversions. Keep this form current each year you have basis or Roth IRA distributions.
Roth ordering rules still protect you
If you withdraw from a Roth IRA and that distribution is not qualified, the ordering rules treat regular contributions first, then conversion amounts, then earnings last. That sequence can limit tax and penalty risk if you need to access principal before the qualified distribution standard is met.
No re-do
Recharacterization (reversal) of conversions is not allowed for tax years after 2017. Choose amounts with care!
Coordinating conversions with charitable giving
Qualified charitable distributions (QCDs) allow IRA owners aged 70 1/2 or older to send dollars directly from an IRA to a qualified charity and exclude the amount from income. For families who are charitably inclined, QCDs can reduce the IRA balance and lower future RMDs without raising adjusted gross income. If QCDs are part of your plan, consider how that interacts with your conversion targets in the pre-RMD window and beyond.
A bracket management process you can repeat each year
- Project your baseline income
List expected wages, bonuses, business income, interest, dividends, and any planned realized gains. If Social Security has not started, estimate when it is likely to begin. If pensions begin later, add the first year they hit. - Map the bracket edges and any IRMAA tiers you want to respect
Use today’s limits for estimates and remember that IRMAA looks back two years. Plan years accordingly. - Estimate RMDs that will begin later
Use the IRS worksheets or your custodian’s tools to project the scale of future RMDs. Your goal is to reduce the pretax balance to a level that makes future RMDs manageable at the tax rates you prefer. - Select a conversion target for the current year
Choose a dollar amount that fills your chosen bracket and reflects any IRMAA planning, portfolio values, and cash available to pay tax. - Decide the path
Convert directly to IRAs. For plans, prefer direct IRA rollovers or direct rollovers to a Roth IRA. Avoid distributions paid to you to avoid triggering mandatory 20% withholding. - Time the conversion
Many people execute conversions after they have good visibility into the year’s income. Remember that for five-year clocks, the tax year is what matters. If you intend to start a clock, do not miss the calendar. - Document and file
If basis exists or you take Roth distributions, complete Form 8606 with your return. Keep confirmations. - Review each fall
Update income, capital gains, and withholding. Adjust your conversion amount before year-end so you land where you intended.
Practical considerations that often get overlooked
Paying the tax
If you pay the conversion tax from outside assets, you move more retirement dollars into the Roth. If you pay tax by having the IRA withhold on the conversion, the withheld amount is itself a taxable distribution and may result in a penalty if you are under age 59 1/2. File accurate estimated payments if needed and coordinate with your tax professional.
Social Security timing
Claiming later increases monthly benefits and may add room to convert in the early years. It also shortens the pre-RMD window. Determine conversion targets with your claiming plan in mind.
State taxes
State treatment varies. Some states exempt pension income or offer partial exemptions for retirement income. A move to a different state changes the math. This is another reason your plan should be reviewed annually.
Plan Roth versus Roth IRA
Remember that a Roth plan has a separate 5-year tax clock for qualified distributions. If you roll into a Roth IRA, the IRA’s qualified distribution clock is based on your first Roth IRA funding year. Keep records on both.
Charitable strategies
QCDs at 70 1/2, bunching gifts into a donor-advised fund before RMDs, or pairing conversions with itemized charitable gifts can all be useful. Coordinate the order of operations so you know which dollars are reducing pretax balances and which are funding your giving.
Gentle nudge
If you need help building a year-by-year conversion lane that aligns with your bracket goals and your Medicare planning, we are happy to model options and then manage the process with you. Schedule an appointment with an advisor here.
Disclosure:
FourThought Private Wealth is an investment advisory firm registered with the U.S. Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or expertise. FourThought Private Wealth is owned by FourThought Financial Partners, LLC, also an SEC-registered investment adviser.
This material is for informational purposes only and should not be considered personalized investment, tax, or legal advice. All investments involve risk, including possible loss of principal. Past performance does not guarantee future results.
FourThought is not a tax advisor. Tax laws are complex and subject to change. You should consult your tax advisor or CPA before implementing any Roth conversion strategy.
Sources: IRS Publication 590-B, Tax on Distributions; IRS Form 8606 Instructions; Medicare.gov IRMAA tables.