The years before RMDs can be a valuable tax planning window
For many Florida retirees, deciding whether to do a Roth conversion before RMDs is not about chasing a tax trick. It is about understanding whether today’s tax cost may create more flexibility later. Often, we see retirees minimizing their tax exposure on a year-by-year basis hoping to pay the least amount of tax immediately. Within this article, we will speak towards many of the considerations you and your tax planner should be seeking to understand from a federal tax level.
You may no longer have wages. Your pension may already be steady. Social Security may not even have started. Your investments may be producing dividends, interest, or capital gains. Your tax return may feel relatively predictable and simple enough to prepare on your own. There might even be a sense of confidence thinking that the tax preparation was simple.
That confidence can change quickly when RMDs begin, and retirees realize earlier planning opportunities may have been missed. Rest assured, even once you are on RMDs, it is still worth understanding your situation better as there are still potential tax wins that can include Roth conversions. It just may not be as effective as it could have been.
Required minimum distributions, often called RMDs, can change the retirement tax picture because they force money out of certain pre-tax retirement accounts. That income can affect your federal tax bracket, how much of your Social Security is taxable, Medicare premium surcharges, and the overall flexibility you have in later retirement.
That is why some retirees ask an important question:
Should I do a Roth conversion before RMDs start?
Maybe. What you need to do first is understand what your goals are currently and in the future.
A Roth conversion is one of those planning topics where the right answer depends on your income, account balances, age, health, spouse, beneficiaries, investment plan, charitable intentions, and long-term goals. The better question may be:
Should I ask my financial advisor or CPA about Roth conversions before my RMDs begin?
For many retirees, that answer is yes. Financial advisors often focus on the investment and retirement income side of the decision without tax included. CPAs often focus on how the decision appears on the tax return and the future tax effect. Those two perspectives need to work together. Building wealth is important but ensuring that the wealth generated isn’t overcome by the taxes associated with that generation of wealth is also important.
In general, a CPA would identify the following as a service when it comes to planning for Roth conversions:
“We provide tax analysis of Roth conversion scenarios, including current and projected tax consequences. We do not provide investment advice, manage assets, recommend securities, or decide whether a conversion is appropriate from an overall financial planning standpoint. The final decision and investment implementation should be coordinated with your financial advisor.”
What is a Roth conversion?
A Roth conversion generally means moving money from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA.
I start many of our planning conversations with a simple question:
Would you rather have $1,000,000 in an IRA or $1,000,000 in a Roth IRA?
Most people answer they would rather have $1,000,000 in a Roth IRA because the Roth account has already been taxed. The IRA upon distribution would typically be taxed between 10% - 37% meaning that IRA account might be worth $900,000 - $630,000 as cash available after taxes. That is the most obvious portion of the answer. There are other reasons as well which often aren’t recognized. Those other reasons become one of the primary reasons why Roth accounts are becoming more popular and conversions are happening more frequently.
Not to dig too deep into the theory but most of our clients develop an understanding that the value of an IRA is the amount that can be realized once taxes are paid out of it based on the tax percentage realized upon distribution. I don’t agree 100% with that characterization but I do believe that we should evaluate the value of an IRA against the effective tax rate at which it would be distributed at. This is one of the primary differences between an IRA and a Roth IRA.
The Roth conversion strategy is not simple and requires a significant amount of planning to avoid costly penalties, other taxes, and reduced deductions.
A Roth conversion in many cases will increase modified adjusted gross income, adjusted gross income, and taxable income in the year of the conversion which likely leads to additional tax needing to be paid. That may affect your federal tax bracket, Social Security taxation, Medicare premiums, estimated tax payments, and other parts of your return.
Why retirees consider Roth conversion before RMDs
The years before RMDs are often more impactful when considering depleting the tax-deferred assets and creating after-tax assets. With proper planning, the idea can create a large tax advantage for some people because you may have more control over distribution strategy and therefore your taxable income prior to RMDs.
There are many planning considerations when developing a Roth conversion plan. It isn’t just the tax bracket you should be worried about. There is also a psychological side to tax planning where the taxpayer must be comfortable paying more in tax sooner. Just because it makes sense doesn’t make some taxpayers feel better about the decision and risks.
A Roth conversion may help some retirees over their lifetime:
- Lower future RMD distributions expectations
- Reduce future social security taxability
- Reduce the risk of recognizing IRMAA income thresholds
- Reduce increased effective tax rates of the surviving spouse
- Leave heirs a different mix of taxable and potentially tax-free accounts
- Provide additional flexibility of distribution strategies due to life-changing events
There are many more planning considerations not listed above, but in all cases these are possibilities and not guaranteed. You must also understand the assumptions that are being made while developing a tax plan around Roth conversions and when those assumptions fail to provide the desired outcome.
Also, in many cases this is a goal for the future that takes many years to complete. The goal for each year is to ask whether converting a specific amount, in a specific year, fits into your larger retirement plan and based on the assumptions made in planning, does this reduce the lifetime tax you will pay.
Why Florida retirees think about this differently
Florida retirees have one major advantage when evaluating Roth conversions: Florida does not impose a personal state income tax. That can make Roth conversion planning feel cleaner than it might in a state that taxes retirement income or IRA distributions.
Without having to worry about Florida taxes, we can now focus on Federal and other state taxes. Often, we find retirees who have lived in other states and retired to Florida, have implemented a tax strategy to significantly defer their taxes towards retirement through retirement plans. As they retire to Florida, many aren’t prepared for the reality of how significant the tax bill will be towards the later years of life.
The RMD problem: forced income later
RMDs are not bad by themselves. They are simply the tax system’s way of requiring money to eventually come out of pre-tax retirement accounts. It is the government’s way of forcing those that deferred their taxes to finally recognize and pay taxes on what they previously earned.
Another source of income may push a retiree into a higher tax bracket or create other tax consequences. In many cases, the RMD is not the only issue. The issue is how the RMD interacts with the rest of the return and the taxpayer’s future.
When looking purely at tax brackets, I ask many of my clients the following question:
Would you like to pay taxes at 24% or 32%?
Every single person has chosen the 24% bracket when they have been asked this question. This is also a good question for the 12% and 22% brackets but there is always an obvious answer that we get from a taxpayer. In most of our planning engagements, we take a focus on the current, future, and adjusted future tax rates. Just keep in mind, there are situations where this is disproved but they are rare and usually involve taxable estates planned to be over $30,000,000.
As a quick example, a client who was recognizing $100,000 in adjusted gross income and $70,000 in taxable income prior to RMDs for 4 straight years. The client had a growing IRA in the amount of $1,500,000. The client now must take $50,000 in RMDs. As the top of the 12% bracket was $90,000 in those 4 years, they had an opportunity to convert $20,000 from their IRA to a Roth IRA at the 12% bracket that would not be taxed at 22% upon being distributed. Once RMDs started for them, they lost this opportunity.
| 202X situation (Before RMD) | 202X+1 situation (After RMD) | |
| Adjusted Gross Income | $100,000 | $150,000 |
| Taxable Income | $70,000 | $120,000 |
| Marginal Tax Bracket | 12% | 22% |
A build-up of taxable income
When being forced to take distributions, not everyone needs that income and cash flow available to them to sustain their lifestyle. They might live on the following income sources without RMDs and soon RMDs will come into their life as well.
- Social Security income
- Pension income
- Investment income
- Rental income
- Annuity income
- Partnership or private equity K-1 income
When RMDs begin, they stack on top of everything else and can create excess disposable income that some aren’t expecting to spend which often gets placed into investment accounts to continue growing. That growth also becomes taxable, creating a spiral of increased income as the taxable investment accounts grow. This growth and tax, though hard to complain about, could have been recognized in a Roth IRA which would grow tax free and not add to an individual’s Modified Adjusted Gross Income.
This is why Roth conversion tax planning is usually more useful when viewed across several years instead of just one tax season. If we are focused on paying the least amount of tax in our lifetime, we find some current year decisions might not look optimal immediately but become optimal over the long-term.
The Social Security tax question
Social Security taxation is based on a provisional income calculation. Many retirees are surprised to learn that Social Security can become more taxable as other income increases. Many retirees that are currently being taxed on Social Security that they may have the opportunity to turn Social Security completely non-taxable to them.
A Roth conversion can increase the income used in that calculation in the year of distribution which would increase Social Security taxation. It also can reduce future RMDs which could reduce the taxability of Social Security in the future. It simply means the conversion should be modeled before it is made.
There are even situations where lower income individuals could perform Roth conversions where no tax would be created. By identifying this opportunity prior to RMDs, this would allow the retiree to completely reduce the taxability of the previous deferral to 0%. We have had multiple clients who found this out too late after they were on RMDs.
Here are some questions to ask your CPA or tax preparer:
- How much of my Social Security is currently taxable?
- Would a Roth conversion make more of my Social Security taxable?
- Is the long-term benefit of the conversion worth the short-term tax cost?
- Would a smaller partial conversion avoid an unnecessary tax surprise?
This is one of the reasons tax planning matters before year-end. Once the conversion is complete, the tax result generally has to be dealt with on the return. You need to understand the impact of your decisions prior to making them.
The Medicare IRMAA question
Medicare premiums can also be affected by an increase modified adjusted gross income.
Higher-income Medicare beneficiaries may pay income-related monthly adjustment amounts, commonly called IRMAA, for Medicare Part B and Part D. You can learn more about IRMAA here.
Many people seek to avoid IRMAA as an unnecessary cost and often it is. A Roth conversion can increase income in the year of conversion, which may affect future Medicare premium calculations. In our planning, IRMAA may be a necessary evil to reach a future tax goal that has a larger tax benefit.
Questions to ask before making a conversion:
- Could this conversion push me into an IRMAA bracket?
- If yes, how much additional Medicare cost could result?
- Is the conversion still worthwhile after considering that cost?
- Would spreading conversions over multiple years produce a better result?
- Should my CPA and financial advisor coordinate before year-end?
IRMAA is one of the most common areas where retirees feel blindsided because the cost may not show up on the tax return itself. Medicare Premiums aren’t technically a tax even though they behave very similarly to other taxes. This leads most tax advisors to be completely unaware of the impact which means asking these questions is extremely important.
The surviving spouse issue
One of the most overlooked Roth conversion questions is what happens after the first spouse passes away. Though we always want to be optimistic and happy, there is an unfortunate reality to life which is often unplanned for, death. This is one of the more sad parts of our job but often the most impactful with planning.
A married couple may currently file jointly and benefit from wider tax brackets. After one spouse dies, the surviving spouse may eventually file as a single taxpayer. That can compress tax brackets and change the retirement tax picture.
Meanwhile, the surviving spouse may still have much of the same income:
- Social Security survivor benefits
- Pension income
- Investment income
- IRA distributions
- RMDs
This can create a situation sometimes called the “widow’s penalty” or “survivor tax trap.” Most tax brackets are nearly cut in half and what previously was taxed at 12% is now 22% and what was 24% turns into 32% for many people.
A Roth conversion strategy during the married years would reduce future pre-tax retirement accounts, but this needs careful modeling. The goal is not to create a large tax bill today out of fear of an unfortunate event. The goal is to understand whether some income should be recognized while both spouses are alive and filing jointly.
Questions to ask:
- What would our tax picture look like if one spouse passed away?
- Would the surviving spouse face higher tax rates on similar income?
- Would partial Roth conversions now reduce pressure later?
- How do beneficiary designations and estate goals affect this decision?
This is where a financial advisor and CPA can work well together. The advisor may understand the account structure and beneficiary goals. The CPA may understand the tax return impact.
When modeling Roth conversions, we are often seeking to realize tax brackets fully during married years that could be realized within single years. This isn’t the right strategy for everyone. The impact of passing down RMDs to beneficiaries and to the single individual may have a much larger impact than allowing the deferred account balance to grow while slowly recognizing the lower brackets while married filing jointly.
Should you force the inheritors to pay the tax?
When looking at tax deferred retirement accounts, someone is usually going to pay taxes on it at some point.
Many of our conversations around tax planning include our clients, who have worked their entire life to amass their retirements, wanting to let the inheritors deal with the tax rather than themselves.
“They get what they get” is the normal line. I get the mentality, taxes are complicated, painful, and psychologically draining. My typical rebuttal is that by taking a little time to understand, you might be able to retain the value you created and reduce the overall tax burden which just makes sense.
Whether you are receiving the inheritance or passing it down, the timeline in many cases accelerates based on tax law. That acceleration of income, especially during the earning years of another taxpayer, can significantly increase the tax rates, reduce deductions, and increase the amount of tax paid on distributions of funds that might have been distributed at lower tax rates. This is important to think about.
A beneficiary that is already paying the 24% tax bracket might be pushed into the 32% bracket or even higher when they inherit a large IRA. If you currently had the ability to recognize the 12% bracket fully, this might be a tipping point to go ahead and make a Roth conversion.
Paying the tax matters
A Roth conversion creates taxable income which means there likely will be a tax bill if not withheld from.
For many retirees, the cleanest strategy is often to pay the tax from non-retirement funds rather than withholding tax from the converted IRA dollars. That may allow more money to land in the Roth account.
However, that is not always realistic.
Before converting, ask:
- Do I have cash available to pay the tax?
- Would paying the tax reduce my emergency fund?
- Would I need to sell investments to cover the tax?
- Would selling investments create additional capital gains?
- Should I increase withholding or make an estimated tax payment?
This is an area where cash flow matters. A strategy may look good on paper but feel uncomfortable if it creates a large tax payment without a plan to fund it.
Roth conversions are not all-or-nothing
This is a part that scares many people. Many retirees hear “Roth conversion” and assume it means converting an entire IRA because some plans call for significant conversion amounts.
That is usually not the way the conversation should start and often is not the result of most planning conversations.
For many retirees, the better discussion is around partial Roth conversions when you move a portion of an IRA to a Roth IRA rather than the whole account balance. Rather than looking at the balance, we are looking for a MAGI and AGI. When you compare the income that you currently have against the MAGI and AGI that you want to have, that is what determines how much you should convert.
When calculating the MAGI and AGI, you have to look at the effects of everything we have mentioned above. It isn’t an easy calculation and it isn’t an exact science for what the answer should be. The goal is primarily to move yourself in a better direction each year.
A partial Roth conversion allows you to convert a selected amount based on your tax picture for that year. The amount may change from year to year depending on your income, deductions, investment activity, Medicare considerations, and cash flow.
A retiree might convert more in one year and less in another. Or, after modeling the numbers, they may decide not to convert at all. Understanding that tax laws change, stock markets change, and priorities change is important. This should be a continual discussion that happens at least yearly.
Developing a plan for the rest of your life rarely goes as planned. The strategy should be flexible.
What we evaluate when planning for a Roth conversion
There is a lot to consider when making a decision with IRA distributions to a Roth.
In our firm, when we plan for Roth conversions, we seek to understand most of the following information in making our determination, it isn’t a short list:
- Age of taxpayers
- Current RMD expectations
- Future income expectations
- Current investment account values
- Charitable giving hopes
- IRMAA considerations
- Cash available to pay the tax
- What happens to the plan for the surviving spouse
- Beneficiary situation
- Incoming inheritance expectations
- Social Security taxability
- Annuity income timetable
- Deferred and taxable account growth
- Large future one-time considerations
The most important factor is what the taxpayer actually wants.
None of these facts automatically means you should convert. They simply mean the question deserves attention and should be evaluated further prior to deciding.
What we hope to accomplish through Roth conversions
As a firm, the impact of the Roth conversions has a relatively large downstream effect on future years of taxation, even when they might be small amounts.
The following are impacts we evaluate as potential tax wins when making our decision:
- Tax bracket implications
- Decreased social security taxation
- Reduced RMD amounts
- Account type tax optimizations
- Beneficiary planning
- IRMAA cliff impacts
- Wealth and estate tax considerations
- Spiraling investment income reduction
The impacts are rarely able to be calculated into the future correctly. As a firm creating a tax plan, we unfortunately don’t have a crystal ball that tells us the future. This creates a scenario where we must make the best guess based on historical and current data to develop assumptions. These assumptions are what drive the analysis.
This is why the best answer often comes from the client’s choice and from comparing several strategies instead of focusing on one.
The best questions to ask your financial advisor
Your financial advisor may not prepare your tax return, but they play a critical role in the Roth conversion conversation and as a firm, we often rely on the financial advisor to implement many of our priorities.
Ask your advisor:
- What are my projected RMDs if we do nothing?
- How large could my IRA balance be when RMDs begin?
- How does a Roth conversion fit with my retirement income plan?
- Which account or accounts would the conversion come from?
- Would we need to sell investments to create cash?
- Are there market or portfolio reasons to convert now or wait?
- How would a conversion affect my heirs?
- Should we coordinate with my CPA before year-end?
- Can we run multi-year projections instead of looking at only this year?
- What assumptions are we making about future tax rates and investment returns?
These questions help turn the Roth conversion conversation from a guess into a planning discussion.
The best questions to ask your CPA
Your CPA may not manage your investments, but they can help you understand the tax consequences.
Ask your CPA:
- What is my current taxable income estimate for the year?
- How much room do I have before moving into a higher tax bracket?
- Would a Roth conversion affect how much of my Social Security is taxable?
- Could the conversion affect Medicare IRMAA?
- Should we make an estimated tax payment?
- Would my investment income, capital gains, or K-1s change the answer?
- What happens if one spouse passes away?
- Does a conversion make sense over multiple years?
- What tax forms will report the conversion?
- What information do you need from my financial advisor?
These questions help avoid the most common mistake: making the conversion first and asking about the tax impact later.
A simple example of a successful conversation
Consider a retired Florida couple in their late 60s.
They have Social Security, Medicare, a modest pension, a brokerage account, and a traditional IRA. They do not yet need to take RMDs at the moment. Their taxable income is currently manageable, but their traditional IRA balance is large enough that future RMDs may increase their income significantly.
They ask their financial advisor to project future RMDs. The advisor estimates that RMDs may create more income than they need later in retirement.
They ask their CPA to estimate how much Roth conversion income could be added this year without creating an unwanted tax result in the current year and how it affects taxes in future years.
Together, the advisor and CPA help the couple compare several options:
- Convert nothing
- Convert a small amount
- Convert enough to use part of the current tax bracket
- Spread conversions across several years
The final answer may not be obvious. But the couple is now making the decision with better information.
That is the point.
Final thought: do not convert just because it sounds smart
Roth conversions can be powerful. They can also be overused, misunderstood, or done at the wrong time.
I truly hope that this article helps you develop an understanding of the many things a Roth conversion can affect while also understanding that this article doesn’t explain and go through every effect a Roth conversion might have.
For Florida retirees, the lack of state personal income tax can make Roth conversions especially tempting. But the federal tax impact, Social Security taxability, Medicare premiums, investment income, and survivor planning issues still matter.
The right question is not:
“Should every retiree do a Roth conversion before RMDs?”
The better question is:
“Should I have my financial advisor and CPA review whether partial Roth conversions before RMDs could improve my long-term retirement tax plan?”
For many retirees, that conversation is worth having.
At Blue Heron CPAs, we help retirees think through tax planning questions like Roth conversions, RMDs, Social Security taxation, Medicare-related tax issues, and investment income. If you are already retired and wondering whether a Roth conversion belongs in your plan, consider bringing the topic to your financial advisor and CPA before making a decision.
FAQs
Are Roth conversions taxable in Florida?
Answer: Florida does not impose a personal income tax, but federal income tax may still apply. Florida DOR confirms Florida does not impose personal income tax.
Can a Roth conversion reduce future expected RMDs?
Answer: Potentially. By moving money out of a traditional pre-tax IRA balance, you reduce the value of the tax-deferred investment vehicle. RMDs are based on the value of those tax-deferred investment vehicles. The result would depend on timing, taxes, investment growth, and future withdrawals.
Do Roth IRAs have RMDs during the owner’s lifetime?
Answer: Current tax law allows Roth IRA owners to leave amounts in the Roth IRA as long as they live, and IRS RMD guidance says Roth IRA/designated Roth withdrawals are not required until after the owner’s death. This may change in the future.
Can a Roth conversion affect Medicare IRMAA?
Answer: Yes. IRMAA uses MAGI, and SSA states MAGI includes AGI plus tax-exempt interest; higher MAGI can increase Medicare Part B and Part D premiums.
Should every retiree do a Roth conversion before RMDs?
Answer: No. The better question is whether a partial Roth conversion should be modeled with your CPA and financial advisor.
Disclaimer: This article is for educational purposes only and should not be treated as personalized tax, investment, legal, or financial advice. The article is written from the perspective of a Florida individual where other states may have different laws. This article has not been updated since the date of writing. Links are provided to easily confirm where the information came from. Use it to help you ask better questions about your situation. For advice tailored to you, consult a qualified tax professional.
Author
Nathan Gauger is the Managing Partner of Blue Heron CPAs and focuses on retirement tax planning—helping retirees make confident decisions around Roth conversions, RMDs, Social Security timing, and Medicare-related costs like IRMAA. His goal is simple: make sure your tax plan supports the life you want in retirement, not just the return you file this year.
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