When is the best time to do a Roth IRA conversion? Here’s how to make the most of this potentially tax-beneficial move.

The Internal Revenue Service will get its share of your hard-earned tax-deferred retirement savings accounts—it’s just a matter of when.

A harsh reality? Maybe. A chance to think strategically about your retirement accounts? Absolute.

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That’s because there may be ideal times — and less-than-ideal times — for people to get the taxes on their IRAs, 401(k)s, 403(b)s, and other tax-deferred accounts ready, if they didn’t. already, according to retirement savings experts.

Finding a good time is an art and a science, they say, involving cold, hard numbers and regulations. But it also involves harder-to-pin-down questions about a person’s future needs and future taxes.

Converting your retirement money to the tax-free version may not be right for everyone, said Devin Carroll, owner of Carroll Advisory Group in Texarkana, Texas.

But people should know what the process entails when it comes to converting a traditional IRA and other tax-deferred accounts to a Roth IRA, he noted.

“There is no best time to do this,” said Thomas Jarecki, national director of wealth planning at KeyBank Key Wealth Management.

But when someone wants to make the move, “there’s an opportunity to get extremely tactical when you want to pull the trigger,” he added.

How to Convert a Traditional IRA to a Roth IRA

It all centers around the act of switching or “converting” money from a traditional tax-deferred account like an IRA to a Roth IRA.

An IRA is funded with pre-tax dollars, and the account holder doesn’t pay taxes on it until they take money out of the account. When people withdraw money from the account after age 59 1/2, that counts as taxable income. (Of course, they can withdraw it before this age, but that triggers a 10% penalty, with some exceptions.)

IRAs have a required minimum distribution, an amount that account owners must take out each year, starting now at age 73.

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Read also: I messed up my first RMD by taking a withdrawal for three accounts. Shouldn’t the bottom line be the only thing that matters?

Meanwhile, a Roth IRA is funded with after-tax dollars. The money comes out of the account without federal income tax because it has already been taxed.

There are inflation-adjusted income limits for Roth contributions. Once sole proprietors have more than $161,000 in modified adjusted gross income, they cannot contribute to a Roth IRA. For married couples filing jointly, the cap is $240,000. Backdoor Roth conversions allow high-income households to avoid Roth IRA income limits and still keep money in the accounts.

“You’re effectively paying retirement taxes in the Roth account,” said Katherine Tierney, senior retirement strategist at Edward Jones.

Before age 59 1/2, contribution amounts can be withdrawn from the account without fees or penalties. But taxes and penalties could apply on distributed earnings. This depends on the purpose of the withdrawal and how long the account has been open.

Roth IRAs do not have RMDs during the owner’s lifetime because the IRS has already collected their debts.

Similar rules apply to 401(k)s and other tax-deferred workplace plans for those who don’t roll over those retirement accounts to IRAs.

Why Convert a Traditional IRA to a Roth IRA?

A good reason to do a Roth conversion is if someone expects to be in a higher tax bracket in the future and wants to lower their future tax bill, Tierney said. This could be someone who is early in their career and is ready to make more money in the future, she noted.

It could also be someone nearing retirement and looking for after-work income, such as Social Security, Carroll said.

“It also makes sense for people who want to leave after-tax bequests to their heirs,” Tierney said. Distributions to inherited IRAs have their own rules, but most non-spousal beneficiaries have 10 years to fully withdraw the money.

But it can be difficult to look that far ahead, for retirement planning or otherwise, Jarecki said. So the benefits of a tax-free retirement account may sound great, but making it a reality is much more difficult.

“As humans, we’re much more focused on the present,” he said. “The impact on finances today often outweighs the potential financial benefits we could get down the road.”

When is the best time to do a Roth conversion?

Carroll said he discusses “track periods” with customers. These are times when they have a financial path to pull off the maneuver, though not an endless one. It often starts when work income dries up in early retirement, he said. Less income means a lighter income tax bill and more room to convert funds without destroying tax brackets.

The IRS counts the converted amount as part of a household’s modified adjusted gross income.

Tracks get shorter once Social Security, Medicare, retirement income and RMDs start coming in, he added. Social Security benefits — which people can claim as early as age 62 — can be taxable depending on how much other income a person earns. Pension payments are also taxable.

In the planning process, people should also be aware that IRA conversions will impact the cost of Medicare premiums, Carroll noted. And there’s a two-year look-back period — so that window starts at 63, not 65 after enrolling in Medicare.

For Carroll, both consequences are a cost of conversion “and should not be a detractor in doing so”.

Uncertainty about the future of the tax code shouldn’t figure too prominently in a person’s thinking about IRA conversions, according to Jarecki.

If lawmakers can’t reach a deal, core features of the tax code will revert to their 2017 status when the Trump tax cuts expire at the end of 2025. They include five of the seven tax brackets returning to higher rates.

There are a lot of questions at stake, including who will be in the White House and which party will control Congress. Carroll and Jarecki both said they could foresee higher fees in the future, but the details beyond that are hard to predict.

So it’s good to watch developments on Capitol Hill, Jarecki said — just don’t fixate on them.

“You don’t want to make the conversion decision just on what may or may not happen for legislative action in two or 20 years,” he said. “That cannot entirely determine your decision.”

Roth conversions are not all or nothing

Jarecki agreed that the interlude shortly after retirement can be a good time for IRA conversions — with some planning. A key consideration is saving enough money ahead of time to afford regular living expenses, plus conversion fees, he noted.

“You actually need money to pay those taxes,” Jarecki said. It’s possible to dedicate some of the converted funds to taxes, but he and others don’t recommend it.

Whenever a person decides to convert funds, the entire IRA amount does not have to be converted at once, Jarecki added. “This is not an all-or-nothing proposition.”

Tierney agreed: “You can do partial conversions – that’s a strategy we take every year.” If someone converts their funds a little at a time, Tierney said, they can see what other income is coming in the year and convert just enough to stay under the next tax bracket.

That’s why the end of the year is a good time to consider any kind of Roth conversion, she said. By then, a person has a good idea of ​​the rest of the fiscal picture and a performance of their portfolio for the year. An underperforming stock market has its problems, but it offers some reassurance to someone doing a Roth conversion; cheaper stock valuations will result in smaller portfolios and a lower fee.

For someone already considering a Roth conversion, “down markets can be an attractive time,” Tierney said, because there’s a chance to “convert the same amount of stock for a lower fee.”

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