Roth Conversion

Detailed Explanation

A Roth conversion takes pre-tax money out of a Traditional IRA, 401(k), 403(b), or similar tax-deferred account and moves it to a Roth IRA or designated Roth 401(k). The converted amount is added to ordinary taxable income for the year of conversion and taxed at the taxpayer's marginal bracket. In exchange, all future growth and qualified withdrawals from the Roth are tax-free. Conversions are most powerful when (1) current marginal rate is lower than expected future rate (gap years between jobs, early retirement before Social Security and RMDs kick in, business loss years), (2) the taxpayer has after-tax cash to pay the conversion tax (paying with the converted balance erodes the strategy), and (3) the taxpayer is younger than the 5-year window expiration. Multi-year laddering: convert just enough each year to "fill up" the 12% or 22% bracket without pushing into the next, sustained over 5-10 years post-retirement and pre-RMD. Critical interactions to model: the pro-rata rule (IRC §408(d)(2)) blends pre-tax and after-tax balances across all Traditional IRAs (not just the one being converted); the 5-year rule for Roth conversions (each conversion has its own 5-year clock for penalty-free withdrawal of the converted principal before age 59.5); IRMAA Medicare premium surcharges (Part B and D premiums two years after AGI threshold crossings); ACA Premium Tax Credit (eligibility cliff at 400% of federal poverty level pre-2026); Net Investment Income Tax (3.8% NIIT thresholds); and Social Security taxation (up to 85% of benefits taxable at higher provisional income levels). Important: TCJA eliminated "recharacterization" of conversions, meaning a Roth conversion CANNOT be undone after December 31 of the conversion year. Conversion model carefully before pulling the trigger.