Some years, your income dips for reasons that have nothing to do with bad luck. You retire before claiming Social Security. You take a sabbatical, change careers, or your business has a slower year. Your paycheck shrinks, but your traditional IRA or 401(k) keeps sitting there, untaxed and growing.
That combination can create an opportunity. If you’re in a favorable tax position this year, moving some of your IRA funds to a Roth IRA through a Roth conversion could mean paying tax on that money now, at a lower rate, rather than later at a higher one.
“Could” is the important word. A conversion that makes sense on paper can create surprises elsewhere on your tax return. Here’s what experienced advisors look at before recommending one.
What a Roth Conversion Actually Does
A Roth conversion moves money from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA. The amount you convert is generally added to your taxable income for the year and taxed as ordinary income. In exchange, qualified withdrawals from the Roth later in life are tax-free, and the original owner of a Roth IRA isn’t required to take minimum distributions.
The Roth IRA itself is a relatively young idea. It was created by the Taxpayer Relief Act of 1997 and named for Senator William Roth of Delaware. For years, households with higher incomes couldn’t convert at all. When the $100,000 income limit on conversions was eliminated in 2010, conversions jumped to nearly ten times the previous year’s level, according to retirement industry data.
Today, anyone can convert, regardless of income. The question is no longer whether you’re allowed to. It’s whether, when, and how much.
Why Low-Income Years Open a Window
The appeal of converting in a low-income year comes down to tax brackets. When your other income is down, more of a conversion may be taxed in lower brackets than it would be during your peak earning years.
For many retirees, the biggest window falls in the “gap years” between leaving work and the start of two major income sources: Social Security and required minimum distributions (RMDs). Under current law, RMDs generally begin at age 73, or 75 for people born in 1960 or later. Once those distributions start, they stack on top of Social Security and any pension, which can push retirees into higher brackets than they expected.
Converting a portion of a traditional IRA during the gap years shrinks the balance that RMDs will be calculated on later. It can smooth taxable income across retirement instead of letting it spike in your 70s.
Working-age households can have windows, too. A year between jobs, a business with an unusually low profit, or a year with large deductions may all qualify, depending on the details.
The First Question: How Much Room Is in Your Bracket?
Advisors rarely ask, “Should you convert?” A more useful question is, “How much can you convert before the cost rises?”
That usually starts with projecting your taxable income for the year and identifying how much space remains before the next bracket begins. Some people convert just enough to “fill up” a lower bracket and stop there, repeating the process over several years rather than converting everything at once.
It also means comparing today’s rate with your likely rate in the future. If you expect to be in a similar or lower bracket later, converting may not help much. If RMDs, a pension, or a surviving spouse moving to single filing status could raise your future rate, paying tax now may be worthwhile.
State taxes factor in as well. Arizona taxes most income, including Roth conversions, at a flat 2.5% rate, while Social Security benefits are exempt from state income tax.
The Ripple Effects Advisors Check Before Converting
A Roth conversion doesn’t just raise your income for the year. That higher income can touch several other parts of your finances, and a tax bracket chart won’t show you all of them.
Social Security taxation. If you’re already receiving benefits, conversion income can make more of your Social Security taxable at the federal level.
Medicare premiums. Medicare Part B and Part D premiums are adjusted based on income reported on your tax return from two years earlier. A large conversion at age 63 or later can lead to higher premiums down the road.
Health insurance subsidies. If you retire before 65 and buy coverage through the Health Insurance Marketplace, premium tax credits are based on income. A conversion can reduce the help you qualify for.
Estimated tax penalties. Retirement account conversions don’t automatically come with enough withholding. The extra income can also subject you to estimated tax penalties and interest on your tax return if your withholdings or payments throughout the year don’t keep up with it.
Each of these may be manageable on its own. The point is to see them before you convert, not after the return is filed.
How Will You Pay the Tax?
How you cover the tax bill can matter almost as much as the conversion itself.
Paying the tax from savings outside the IRA generally makes a conversion more effective, because the full converted amount stays in the Roth and continues growing tax-free. If you have taxes withheld from the conversion instead, less money ends up in the Roth.
Age adds another wrinkle. If you’re younger than 59½, the portion withheld for taxes is treated as a distribution rather than a conversion, which may trigger the 10% early withdrawal penalty in addition to income tax.
For that reason, many advisors look at cash reserves and planned expenses before settling on a conversion amount. A conversion that drains your emergency savings to pay the tax may create more risk than it removes.
Rules That Can Catch People Off Guard
A few rules deserve attention before any money moves.
Conversions can’t be undone. Before 2018, you could reverse a Roth conversion through a process called recharacterization. Tax law changes eliminated that option, so once a conversion is complete, it’s permanent for that year’s return.
The five-year rule. Each conversion generally has its own five-year clock. If you’re under 59½ and withdraw converted money before five years have passed, a penalty may apply.
The pro-rata rule. If you’ve made after-tax (nondeductible) contributions to any traditional IRA, you generally can’t convert only the after-tax dollars. The IRS looks at all your traditional IRA balances together when calculating how much of a conversion is taxable.
None of these rules make conversions a bad idea. They simply mean the details need attention up front.
Who Inherits the Account Matters Too
A Roth conversion isn’t only about your own retirement. It can also change what your heirs receive.
Under current rules, most non-spouse beneficiaries who inherit an IRA must empty the account within 10 years. With a traditional IRA, those withdrawals are generally taxable, often arriving during the beneficiaries’ own peak earning years. Qualified withdrawals from an inherited Roth IRA are generally tax-free.
For families focused on legacy, paying conversion taxes during a low-income year can be a way to hand down more flexible, tax-efficient assets. It works best when it’s coordinated with beneficiary designations and the broader estate plan.
Bringing It Together
A Roth conversion is rarely a one-time decision. It usually works best as part of a multi-year strategy that looks at income, taxes, Social Security timing, Medicare, cash flow, and legacy goals together.
That is where thoughtful financial planning makes the difference. Financial advisors who understand how each decision is reported on a tax return can project several years ahead, test different conversion amounts, and help you decide how much to convert each year, if at all. For retirees in Surprise and throughout the West Valley who are entering their gap years, that planning can turn a quiet income year into a lasting advantage.
When comparing financial advisor services, it’s worth asking whether an advisor builds tax projections into their recommendations or treats taxes as someone else’s job. With Roth conversions, the two are inseparable.
The Bottom Line
A low-income year can be one of the best times to consider a Roth conversion, but the right amount depends on far more than your tax bracket. Look at how the extra income affects Social Security, Medicare, health coverage, and estimated payments. Plan how you’ll pay the tax, understand the rules that can’t be reversed, and consider who will eventually inherit the account. With those pieces in view, you can decide whether a conversion truly fits your plan.
About Biz Financial, LLC
Serving clients from Surprise to Prescott, Biz Financial, LLC is led by Jason Bisdorf, a CPA who also holds the AICPA’s Personal Financial Specialist (PFS) credential. Their planning connects retirement, investment, insurance, and estate decisions with how each one shows up on a client’s tax return. To talk with their team, call (602) 800-7864 or Find their office on Google Maps.
