Trust Encompass

Roth Conversion Planning

A Roth conversion isn't automatically good or bad — it depends entirely on timing, amounts, and your specific tax situation. Strategic conversion planning creates a compounding tax advantage that accumulates over decades.

Millions of Americans have accumulated significant wealth in tax-deferred retirement accounts — 401(k)s, traditional IRAs, SEP-IRAs. Every dollar in these accounts has never been taxed. When withdrawn, it becomes ordinary income. Roth conversion planning asks a fundamental question: is it better to pay tax now at known rates, or later at unknown rates — potentially on a much larger balance?

01The Core Conversion Logic

A Roth conversion moves money from a tax-deferred account (where growth is taxed later) to a Roth account (where growth is tax-free forever). You pay income tax on the converted amount in the year of conversion. In exchange, all future growth and qualified distributions from the Roth account are completely tax-free — including to your heirs after you pass. The analysis centers on your current tax rate versus your expected future tax rate.

  • Converting in low-income years locks in today's bracket rate
  • All future growth in the Roth account is permanently tax-free
  • Roth accounts have no Required Minimum Distributions during the owner's lifetime
  • Heirs receive the Roth account income tax-free (subject to the 10-year rule under SECURE Act)

02When Conversion Makes Sense

The most advantageous Roth conversion opportunities typically arise in the early retirement window — after leaving employment but before Social Security and RMDs create an income floor. In these years, taxable income may be artificially low, creating space in lower tax brackets that can be 'filled' with Roth conversions at a cost-effective rate.

  • Early retirement years (ages 60-72) before RMDs begin at 73
  • Years when ordinary income is temporarily reduced (sabbatical, partial retirement)
  • After a business sale when other income is lower than usual
  • During a market downturn when account values — and therefore tax cost — are lower

03When Conversion May Not Make Sense

Roth conversion is not universally beneficial. Converting large amounts in high-income years can push you into higher tax brackets, trigger IRMAA Medicare surcharges, or reduce the efficiency of the strategy. A conversion that's too large can cost more than it saves. The analysis requires projecting lifetime tax outcomes — not just looking at this year's bracket.

  • Avoid conversions that push income into significantly higher brackets
  • Be aware of IRMAA thresholds — a conversion can trigger Medicare surcharges two years later
  • If you expect your tax rate to be lower in retirement, conversion may not improve your outcome
  • Converting at 32% to avoid 22% in retirement is not a winning strategy

04The Roth Conversion Corridor Strategy

Rather than converting a single large amount in one year, the corridor strategy involves systematic annual conversions over multiple years — filling the top of a target tax bracket each year without crossing into a higher rate. Over 8-12 years, this methodically converts a substantial portion of a traditional IRA balance into Roth accounts while maintaining rate efficiency across the entire conversion period.

  • Annual conversions sized to fill but not exceed a target bracket (e.g., the 22% or 24% bracket)
  • Modeled using projected income from Social Security, pensions, and other sources
  • Revisited annually as tax law, balances, and personal circumstances change
  • Coordinated with RMD amounts to ensure total income stays within target range

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