Quick Read
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Spreading a Roth IRA conversion across multiple years—rather than executing it in a single transaction—allows a greater portion of the funds to be taxed at lower federal rates.
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Converting $500,000 over five years, with annual amounts of $100,000, can generate savings exceeding $50,000 by keeping the conversion within the 24% tax bracket instead of pushing income into the 35% bracket.
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Smaller, annual conversions also help avoid Medicare premium surcharges and reduce the taxation of Social Security benefits, providing additional financial advantages.
Roth IRAs eliminate the need for required minimum distributions, enabling retirees to manage tax liability more effectively.
However, executing a Roth conversion in a single year can incur significant tax costs.
The smarter way to do a Roth conversion
Many assume that completing a Roth conversion promptly is advantageous; however, doing so in a single year can elevate taxable income and push individuals into higher federal tax brackets, resulting in a larger tax liability.
Each dollar transferred to a Roth IRA is taxable in the year of conversion, as those contributions were made pre‑tax in a traditional retirement account.
What’s Your Number…?
Staying in a lower tax bracket could save you tens of thousands
To appreciate why spreading Roth conversions over multiple years is beneficial, it is essential to understand the progressive nature of the federal tax code. Each additional dollar of taxable income may be subject to a higher marginal rate once a bracket threshold is exceeded.
For 2026, single filers remain in the 24% federal tax bracket until taxable income reaches $201,775; earnings above that level are taxed at 32%, with rates increasing thereafter. Consequently, the timing of a Roth conversion becomes critical.
Consider a single retiree with $100,000 of existing taxable income who wishes to convert $500,000 from a traditional IRA to a Roth IRA. Converting the full amount in one year would push much of the conversion into the 32% and 35% brackets, increasing the overall tax burden.
Conversely, spreading the conversion over five years—approximately $100,000 annually—could keep the entire conversion within the 24% bracket, potentially saving a substantial amount in taxes.
Paying 24% on a $500,000 conversion versus nearly 35% could yield tax savings exceeding $50,000.
Exact savings vary based on income, deductions, state taxes, and other variables; however, avoiding higher brackets can preserve significant additional capital.
A slower conversion strategy has other benefits
A gradual conversion strategy offers benefits beyond lower tax rates. Large, one‑time conversions can raise adjusted gross income, potentially triggering additional financial obligations such as Medicare surcharges.
Higher income from a large conversion could increase Medicare premiums through income‑related monthly adjustment amounts and may increase taxation of Social Security benefits. Spreading conversions reduces these secondary impacts.
Such a strategy also provides flexibility; future conversion amounts can be adjusted in response to legislative changes or shifts in personal circumstances, avoiding a single, inflexible taxable event.
