Use Roth IRA Conversions To Cut Your Taxes And Boost Retirement Income

An IRA to Roth IRA conversion can be a smart move that can help you keep more of your money in retirement. In this article, I’ll explain what a Roth IRA Conversion is, why it can be powerful for high earners, and how it compares to traditional saving. We’ll also look at how this strategy works for a couple nearing retirement, and how it can help them avoid higher taxes and Medicare surcharges later in life.

In fact, retirement accounts that have embedded taxes to be paid overstate how much you will get to spend. I wrote this article about tax adjusted returns.

What Is a Roth IRA Conversion?

A Roth IRA Conversion means moving money from a traditional tax-advantaged retirement account, like a 401(k) or Traditional IRA, into a Roth IRA. When you do this, you pay income taxes on the amount you convert now, but then your money will not be subject to any more taxes or the potential of triggering Medicare’s Income-Related Monthly Adjustment Amount. Ideally you pay the taxes at a rate lower than what it would have been or will be in the future. You can learn more on IRS.gov

Roth 401(k) vs. Traditional 401(k): Impact on Take-Home Pay

A big decision when saving is whether to put money into a Roth 401(k) or a traditional 401(k). The difference comes down to when you pay taxes.

• Traditional 401(k): You don’t pay income tax on your contributions now. That means more take-home pay today. But you’ll pay taxes when you take the money out in retirement.
• Roth 401(k): You pay income tax now. That means less take-home pay today, but tax-free withdrawals later.

Let’s say you’re in the 24% federal tax bracket. If you save $10,000 into a traditional 401(k), it only reduces your take-home pay by $7,600, because you save $2,400 in taxes now. That said, you will have to pay income tax on both the $10,000 you saved this year and the growth of the account. You may also potentially trigger IRMAA (Income-Related Monthly Adjustment Amount) when the money is withdrawn after age 65.

But if you put that same $10,000 into a Roth 401(k), your take-home pay goes down by the full $10,000, since you’re paying taxes now.

So, while Roth contributions lower your paycheck today, they can give you more flexibility and tax-free income later. Roth withdrawals are tax-free and IRMAA free.

A Real-Life Example: Roth IRA Conversion at Age 50

Let’s look at a married couple who both turn 50 in March 2025. Together, they make $200,000 a year. Their income grows by 3% each year. They each contribute the maximum allowed to their 401(k):

• $23,000 + $7,500 catch-up in 2025 = $30,500 each
• That’s $61,000 total saved per year

Let’s assume they retire at age 67—their Full Retirement Age for Social Security. After retirement, their income drops to $100,000 per year, including Social Security.

If they do not do a Roth IRA Conversion, here’s what happens:

• Their traditional 401(k)s keep growing
• At age 75, they must start taking Required Minimum Distributions (RMDs)
• Their RMDs push their income higher, potentially triggering IRMAA (Medicare surcharges)
• Once one spouse dies at age 85, the surviving spouse files as Single, leading to higher tax rates and a greater chance of IRMAA

But if they do annual Roth IRA Conversions, staying within the 24% tax bracket, they slowly move money out of their 401(k)s and into Roth IRAs while keeping taxes under control.

By converting roughly $50,000 per year (amount varies by inflation and income), they reduce future RMDs and possibly eliminate IRMAA in retirement.

Projected Required Minimum Distributions (RMDs)

Below is a comparison of estimated RMDs for the couple beginning at age 75, based on two strategies:

What Is IRMAA and Why Does It Matter?

IRMAA stands for Income-Related Monthly Adjustment Amount. It’s an extra charge on your Medicare Part B and Part D premiums if your income is too high. For 2025, if your income is above $206,000 (married filing jointly), your premiums can increase by hundreds of dollars per month. You can view the current IRMAA brackets here.

Roth IRA Conversions can help you keep your future income lower, which may help you avoid IRMAA.

Tax Effects Roth conversions vs Required Minimum Distribution

Without Roth conversions, the couple builds up a much larger taxable account balance. At age 75, their RMDs are more than three times higher than if they had slowly converted assets into a Roth.

Larger RMDs may:

• Push their taxable income above Medicare IRMAA brackets
• Increase their Medicare Part B and D premiums by thousands per year
• Lead to higher taxes for the surviving spouse, who files as single starting at age 85

By converting earlier in life—when their tax rate is stable—they reduce future taxable income and gain flexibility in retirement.

Roth Conversion Scenario Comparisons

_{Assumptions from this chart:}

• _{RMDs are based on average growth (7%) and IRS life expectancy factors.}
• _{Taxable Income includes Social Security and other retirement income.}
• _{Federal Tax assumes the standard deduction and 2025 marginal tax brackets.}
• _{IRMAA starts once MAGI exceeds approx. $206,000 for a couple, with each spouse paying an extra $1,800/year for Medicare Parts B & D in the first tier. Rates increase for higher income tiers.}
• _{Roth conversions were done between ages 50–67, gradually emptying traditional IRAs and 401(k)s.}

Key Takeaways:

• Without Roth conversions, the couple pays up to $18,800 more per year in combined taxes and IRMAA by their 80s.
• The RMDs nearly quadruple, increasing taxable income and reducing flexibility.
• IRMAA penalties alone can add up to $36,000 over a decade—avoidable with careful tax planning.

Roth IRA Conversion and Legacy Planning Benefits

Another key benefit? Roth accounts are tax-free for heirs. If one spouse dies, the surviving spouse can use the Roth IRA without worrying about RMDs. When both pass away, their heirs inherit tax-free income (as long as the account is held for at least 5 years).

Final Roth IRA Conversion Thoughts

Roth IRA Conversions are a powerful way to take control of your retirement taxes. They help you avoid surprises, reduce Medicare costs, and leave more to your loved ones. If you’re in your 50s or 60s, it’s not too late to benefit from this strategy.

Roth IRA Conversions don’t work for everyone. Here are signs they may be right for you:

• You expect taxes to go up in the future
• You have years before RMDs start
• You have savings to pay the conversion tax
• You want to reduce IRMAA or tax hits in widowhood

A conversion works best when you can stay in a reasonable tax bracket, like 24% or lower. Check the current federal tax brackets on IRS.gov.

Talk to a financial planner or tax advisor to see how much you can convert without moving into a higher bracket. And make sure you understand the long-term impact.

By the way, if you are currently still saving for retirement, you can save in a Roth IRA or Roth 401(k) which will reduce the amount of money you will have to convert.

Want to dive deeper into tax-smart retirement planning? Check out these useful resources: