Roth Conversions Before RMDs: What Should Retirees Consider?

“One smart move to manage this is converting some of your tax-deferred accounts into a Roth IRA before RMDs kick in. Sure, you’ll pay taxes on the conversion upfront, but the long-term benefits—tax-free growth and no RMDs from the Roth—can make it well worth it. It’s a matter of balancing a short-term tax hit for future tax freedom. Some people mistakenly think, I’ll just convert my RMD to a Roth when the time comes. While that sounds great in theory, it doesn’t quite work like that. Roth conversions aren’t treated as distributions, so they don’t count toward your Required Minimum Distribution (RMD) for the year. You’ll still need to take your RMD first and pay any taxes due on it, and then, if you want, you can convert additional traditional IRA funds to a Roth—but the RMD itself has to come out as a taxable distribution.”

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“When it comes to Roth conversions, there’s an extra layer of strategy you can use to save even more on taxes—topping off your current tax bracket. Think of your income as fitting into buckets. You want to fill up a bucket as much as possible before spilling into the next one because higher tax brackets mean higher taxes. The trick with Roth conversions is to convert just enough each year to stay within a lower tax bracket.

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This ‘top-off’ strategy is especially effective in managing future tax bills. The key is to plan your conversions carefully and to avoid converting so much that you push yourself into a higher tax bracket unnecessarily. A well-executed Roth conversion strategy can help you smooth out your taxable income, avoid big RMDs later, and ultimately pay less in taxes over the long run.”