The Best Time to Do a Roth Conversion May Surprise You

If you've spent most of your working life saving in a traditional IRA or 401(k), retirement can introduce a new kind of tax problem -- what you didn't pay the IRS earlier, you eventually have to pay later. In fact, even if you're able to manage your retirement expenses on Social Security and don't need to tap your savings, with a traditional IRA or 401(k), you don't get a choice.

Once you turn 73 or 75, depending on your year of birth, you'll be forced to take required minimum distributions (RMDs) from a traditional retirement account. Those forced withdrawals could drive up your taxes and have other unwanted consequences.

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If you don't like the sound of that, then it pays to look into a Roth conversion. A Roth conversion lets you move money from a traditional retirement account into a Roth IRA, pay taxes on the amount you convert, and then sit back and watch those funds grow tax-free going forward.

But some people assume the best time to convert to a Roth is during their working years, before retirement. That could actually be the worst time, for one big reason.

Your lowest-income years could be your biggest opportunity

If you do a Roth conversion at the tail end of your career, you risk getting hit with a whopping tax bill. The reason?

At that point, you may be earning a pretty respectable salary. And if so, the combination of your regular wages plus the conversion amount could easily bump you into a higher tax bracket.

On the other hand, you may have an opportunity to do a Roth conversion after you retire but before RMDs kick in. If you have a few years when you're not working and are mostly living on Social Security, your taxable income may be pretty low. That could be a good time to move funds out of a traditional retirement account.

Waiting too long could limit your options

The more time you give yourself to do a Roth conversion, the less intense the tax hit might be.

Imagine you have $1.2 million you want to convert to a Roth IRA. If you do that conversion in three years, you're moving $400,000 per year. Even if your remaining income is negligible, you could still be looking at a very large tax bill.

But if you give yourself eight years to do that conversion, you're moving $150,000 per year. That could keep you in a much lower tax bracket.

A Roth conversion could spare you the cost and hassle of having to take RMDs. But it's important to get your timing right. That means taking advantage of years when your income is lower and giving yourself a longer window, especially if you have a larger sum of money to convert.

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