Do You Need a Roth Conversion After You Retire?

The two quiet years

Between the last paycheck and the arrival of Social Security, Medicare rules, and a pension, most retirees pass through a valley. Income drops, which means the tax rate on each extra dollar drops too. For this CPA, that valley is roughly the two years before his pension and Social Security begin around 65. Fottrell's point was blunt. Those are the cheapest tax years he will ever have again, and letting them pass without converting is its own quiet cost.

There is a second lever hiding in that same valley. Every year you delay Social Security past full retirement age, your monthly check grows by about 8 percent. A retiree who lives on savings for a couple of years and converts in the meantime can arrive at 70 with both a bigger check and a Roth that will never be taxed. The low-income years do double duty.

What Social Security has to do with it

Here is the part nobody thinks about. Pulling money out of a 401(k) raises your taxable income, and that can drag more of your Social Security benefits into the taxable zone. For a married couple, benefits start becoming taxable when half your Social Security plus your other income passes about $32,000, and as much as 85 percent of your benefits can be taxed at higher incomes. A Roth, by contrast, produces withdrawals that never count as income at all, so it cannot push your benefits over the line.

The Medicare catch

Then there is Medicare. A Roth conversion is income, and Medicare sets its Part B and Part D premiums partly by your income from two years earlier. One large conversion at 63 can nudge a couple across an IRMAA threshold and raise their premiums at 65. The fix is the same one Ramsey keeps repeating. Convert in smaller slices, and keep an eye on where each slice lands.

The question that actually matters

A conversion only pays off when the tax you pay today is lower than the tax you or your heirs would pay later. The CPA's hunch was that his rate would not change much. For some people that is true, and the whole exercise is a wash. But the math is rarely just about the bracket. It is about Social Security taxation, Medicare premiums, and what happens when one spouse dies and the survivor files alone. Fottrell's recommendation was to hire a fee-only planner or an enrolled agent and run both scenarios side by side.

• Estimate your current bracket and the one you will likely land in once RMDs and Social Security start.
• Check whether extra income would push more of your Social Security over the $32,000 line.
• Check whether a conversion would cross an IRMAA threshold and raise Medicare premiums two years out.
• If the numbers look close, run both scenarios with a fee-only planner or an enrolled agent.

The most endearing part of the letter is that a man who spent his career in accounting still asked. He saved $1.2 million, did everything right, and wanted a second opinion before touching a dollar of it. That is not confusion. That is care, and it is exactly the kind of question worth asking while the answer is still cheap.