Roth Conversion Planning Before RMDs Begin

If you have significant savings in a traditional IRA or 401(k), your largest tax bill may not arrive while you’re working. It could come after you retire.

That’s because required minimum distributions—better known as RMDs—can create more than taxable income. They may also affect your Medicare premiums, the taxation of your Social Security benefits, your future tax flexibility, and the legacy you leave behind.

In this lesson from the Retirement Income School™, I explain why the years before RMDs begin may offer an important Roth-conversion planning opportunity. We’ll also walk through six potential chain reactions of RMDs and a hypothetical $1 million Roth-conversion strategy using a Roth-friendly fixed indexed annuity.

Why Roth Conversions Are Receiving So Much Attention

A common question I hear is: Why are so many people talking about Roth conversions right now?

The answer begins with tax history.

Tax rates have changed many times over the years. The top federal income tax rate has been as low as 7% and, during the 1940s, as high as 94%. Today’s rates are considerably lower, but the larger lesson is simple:

Tax laws change.

Current tax brackets give us a known set of rules that we can plan around. However, even provisions described as permanent can be changed by a future Congress.

That doesn’t mean taxes will definitely increase. It means retirement planning should be based on the rules we know today while remaining flexible enough to respond to future changes.

For people who are retired or approaching retirement, the years before RMDs begin may provide an opportunity to evaluate whether intentional Roth conversions fit into the broader retirement plan.

Why Planning Before RMDs May Be Easier

Roth conversions can still be completed after RMDs begin, but the process becomes more complicated.

Once you are subject to RMDs, the required distribution generally must be taken before converting additional traditional IRA funds to a Roth IRA. The RMD itself cannot be converted.

That means the years between retirement and the beginning of RMDs can sometimes provide a useful planning window—especially when taxable income is temporarily lower.

The goal is not to predict future tax laws. It is to make proactive decisions while you still have flexibility.

Depending on your circumstances, partial Roth conversions may help you:

• Reduce the balance subject to future RMDs
• Spread taxable income across multiple years
• Create tax diversification
• Gain more control over future withdrawals
• Build a potentially more tax-efficient legacy

Roth conversions are not simply about paying taxes today instead of tomorrow. They are about deciding when, how, and at what potential rate you want to recognize taxable income.

The Value of Tax Diversification

Many retirees have most of their savings in traditional IRAs, 401(k)s, 403(b)s, or TSP accounts.

These accounts may have helped reduce taxes during the working years, but withdrawals are generally taxable as ordinary income. If nearly all your retirement savings are tax-deferred, you may have fewer options for managing taxable income later.

Tax diversification means spreading retirement savings across different types of accounts:

• Tax-deferred accounts, such as traditional IRAs and 401(k)s
• Taxable accounts, such as brokerage and savings accounts
• Tax-free accounts, such as Roth IRAs when distribution requirements are satisfied

Having multiple account types may provide greater flexibility when deciding where retirement income should come from each year.

Unlike traditional IRAs, Roth IRAs do not require distributions while the original owner is alive. Qualified Roth IRA distributions are also federally income-tax-free.

That can make Roth assets valuable during years when you want to manage taxable income, avoid crossing certain tax thresholds, or access additional money without increasing adjusted gross income.

The Six Potential Chain Reactions of RMDs

RMDs are more than a withdrawal requirement. Once they begin, they can create a ripple effect across several areas of your retirement plan.

1. Higher Taxable Income

RMDs generally begin at age 73 under current rules, although the applicable starting age depends on your birth year. For individuals born in 1960 or later, the starting age is scheduled to be 75.

The amount you must withdraw is generally calculated using your prior year-end account balance and an IRS life-expectancy factor.

If your tax-deferred accounts have grown substantially, the resulting distribution may increase your taxable income—even when you do not need the money for living expenses.

Failure to withdraw the full required amount may result in an excise tax, although a lower tax may apply when the shortfall is corrected within the permitted period. The IRS provides current RMD rules and guidance.

2. More Social Security May Become Taxable

Depending on your combined income, up to 85% of your Social Security benefits may be included in taxable income.

An RMD can increase your income enough to cause a larger portion of those benefits to become taxable. This does not mean Social Security is taxed at an 85% rate. It means up to 85% of the benefit may be included when calculating taxable income.

3. Higher Medicare Premiums

Medicare uses modified adjusted gross income to determine whether you must pay an income-related monthly adjustment amount, commonly called IRMAA.

IRMAA is based on income from two years earlier and operates using income tiers. Crossing into the next tier—even by a small amount—can result in higher Medicare Part B and Part D costs.

That makes Medicare planning an important part of Roth-conversion planning. A conversion may create additional taxable income now, so the potential future benefits should be evaluated alongside the possibility of near-term IRMAA surcharges.

4. Less Tax Flexibility

Higher income may affect the availability of certain deductions, credits, and planning opportunities.

Your income can influence:

• Medicare premiums
• The taxation of Social Security
• Capital-gains rates
• Deductions and tax credits
• The taxation of other retirement income

A well-planned conversion strategy considers more than the federal tax bracket. It looks at how additional income may interact with the entire tax return.

5. The Widow or Widower’s Tax Penalty

When married couples file jointly, they benefit from wider tax brackets and a larger standard deduction.

After one spouse dies, the surviving spouse may eventually file as a single taxpayer while continuing to receive similar income. The survivor may also inherit the remaining retirement accounts and their future RMDs.

This can create a difficult combination:

• Similar taxable income
• Larger inherited tax-deferred balances
• Narrower single-filer tax brackets
• Lower Medicare IRMAA thresholds

Roth conversions completed while both spouses are alive may help reduce the amount of tax-deferred money the surviving spouse must manage later.

6. A Larger Taxable Inheritance

Many non-spouse beneficiaries who inherit an IRA must empty the account within 10 years, although exceptions and additional distribution rules may apply.

Adult children often inherit retirement accounts during their highest-earning years. Taxable inherited IRA distributions may then be added to income from their careers, businesses, or other investments.

A Roth IRA can potentially provide a more tax-efficient inheritance. Beneficiaries are still generally subject to distribution rules, but qualified Roth withdrawals are typically tax-free. The IRS explains the beneficiary categories and inherited-account rules.

A Hypothetical $1 Million Roth Blueprint

Let’s look at a hypothetical example using Sam and Sally.

Sam is 66, Sally is 63, and they live in Colorado. They have $1 million in a traditional IRA that they would like to convert over time.

Their goals are to:

• Reduce future RMDs
• Create more tax-free retirement assets
• Improve tax diversification
• Manage the tax impact over several years
• Leave a potentially more tax-efficient inheritance

They currently have enough income to support their lifestyle and do not expect to rely on the IRA for routine retirement expenses. They view this money primarily as a long-term reserve and legacy asset.

Rather than converting the entire $1 million in one year, their hypothetical plan spreads conversions over several years while targeting a selected federal tax bracket.

This is where planning becomes important.

A large one-time conversion could create unnecessary tax consequences, increase Medicare premiums, and push income into a higher bracket. A series of partial conversions may make it possible to manage those effects more intentionally.

What Happens If They Do Nothing?

In the hypothetical baseline, the IRA continues growing until Sam reaches RMD age.

If the account were the couple’s only tax-deferred retirement asset and grew at the assumed rate, their first RMD could be approximately $63,000. That distribution would be taxable even if they did not need the income.

As the account and RMDs continued to grow, the additional income could potentially:

• Increase their federal and state taxes
• Make more Social Security taxable
• Move them into a higher Medicare IRMAA tier
• Reduce future planning flexibility
• Increase the taxable balance eventually inherited by their children

This does not automatically mean a Roth conversion is the right answer. It means the cost of doing nothing should be compared with the cost and potential benefits of converting.

How a Roth-Friendly Annuity May Fit

In this hypothetical strategy, Sam and Sally use a fixed indexed annuity as the funding vehicle for their Roth conversions.

A fixed indexed annuity may offer:

• Protection from direct market losses
• Interest-crediting potential tied to an external index
• Contractual bonus features on certain products
• Multiple crediting strategies
• Tax deferral before funds are converted or distributed

The hypothetical annuity includes an initial premium bonus and additional contractual bonuses during the early years. The strategy coordinates partial conversions with the annuity’s available value, bonuses, and potential index credits.

The objective is to use value created within the contract to help offset the taxes associated with the conversions, reducing the need to draw tax money from another part of the portfolio.

However, this does not eliminate the tax bill.

Taxes are still due on taxable amounts converted from the traditional IRA. Annuity bonuses, index credits, and future contract values depend on the specific product, its terms, and actual crediting results.

Disclaimer: Bonuses may be subject to vesting schedules or recapture provisions. Index credits are not guaranteed and may be limited by caps, participation rates, spreads, or other contract terms. Withdrawals may also be subject to surrender charges and could reduce available contract benefits.

Understanding the Hypothetical Results

In the example, the $1 million Roth conversion is completed over five years.

The illustration assumes that the annuity receives its stated contractual bonuses and averages a 5% interest-crediting rate over time. Under those assumptions, the couple pays the projected conversion taxes from the annuity’s available value and finishes the conversion period with approximately $1.142 million in the Roth IRA.

At the end of the 10-year period, the projected Roth value is approximately $1.531 million after an estimated $368,866 in conversion taxes has been paid from the strategy.

These numbers are hypothetical—not guaranteed.

Actual results could be higher or lower. If an index-crediting period produces no credited interest, the contract may receive a 0% index credit for that period. Product availability, bonus terms, crediting rates, tax laws, personal income, and Medicare thresholds can also change.

The purpose of the example is not to promise a particular result. It is to demonstrate how retirement income, taxes, RMDs, Medicare, and annuity features can be coordinated within one planning process.

What This Strategy Is Designed to Accomplish

The Roth blueprint is designed to evaluate whether a series of planned conversions may help:

• Reduce or eliminate future RMDs on converted assets
• Increase tax diversification
• Manage conversion taxes over multiple years
• Protect a portion of retirement assets from direct market losses
• Create greater flexibility for future withdrawals
• Improve the tax characteristics of a potential inheritance

The strategy can also be adjusted around different planning limits.

For example, a household might target a specific federal tax bracket or limit annual conversions to avoid exceeding a selected Medicare IRMAA tier. A lower annual conversion amount may reduce the immediate tax impact but extend the conversion schedule.

There is no single conversion amount or timeline that works for everyone.

Roth Conversion Planning Is About Control

Roth conversions are not about:

• Converting every tax-deferred dollar at once
• Avoiding taxes entirely
• Predicting exactly where tax rates will go
• Assuming future investment or annuity performance

They are about intentional planning.

A coordinated strategy may allow you to choose when taxable income is recognized, create different types of retirement assets, and reduce the amount of money exposed to future RMDs.

The ultimate goal is greater flexibility.

When you understand today’s tax brackets, your expected retirement income, future RMDs, Medicare thresholds, and legacy goals, you can make decisions before those decisions are forced on you.

What to Do Next

If you have significant savings in traditional IRAs, 401(k)s, 403(b)s, or TSP accounts, now may be a good time to estimate your future RMDs and evaluate your Roth-conversion options.

A complete analysis should consider:

1. Your current and projected taxable income
2. Your federal and state tax brackets
3. Your expected RMD starting age
4. Social Security and pension income
5. Medicare IRMAA thresholds
6. How conversion taxes will be paid
7. Your need for liquidity and retirement income
8. Your goals for surviving spouses and beneficiaries

To explore whether a Roth blueprint may fit your retirement plan, visit Retirement Income School™ and click the link at the top of the page to book a Q&A call, or schedule HERE.

DISCLAIMER:
The information in this lesson is provided for general educational purposes only and does not constitute financial, legal, or tax advice. Retirement Income School™ and Dr. Amanda Barrientez do not provide individual investment recommendations. Always consult with a licensed advisor or tax professional before implementing any strategy discussed.