Planning for Large Roth Conversions

The previously untaxed portion of a conversion is generally included in income for that conversion year. Adding more taxable income may move some income into higher federal brackets.

A large account is not, by itself, a reason to convert it. The comparison should include current cash needs, other income and how the retirement plan may change.

Partial conversions in separate tax years may be considered to manage the amount of income recognized in each year. Each year's other income and deductions affect that comparison.

A schedule is a planning approach, not an assurance of a lower lifetime tax cost. Future income and tax rules can change.

Non-IRA cash may be considered for paying the tax, rather than withholding it from the amount distributed. Withheld money is not deposited into the Roth IRA.

Amounts kept out of the conversion generally remain subject to the applicable distribution rules and may face an additional early-distribution tax depending on age and exceptions. Using outside cash also affects the funds available for other needs.

A taxable conversion can increase the income used for Medicare Part B and Part D IRMAA. SSA normally uses income-tax information from two years before the premium year.

Include that timing in the comparison rather than assuming the conversion's only cost appears on the current income-tax return.

State and local income taxes depend on the applicable jurisdiction and your circumstances. Residence therefore belongs in the discussion alongside federal tax rules.

If you are moving, ask a qualified tax professional to review residence and timing rather than assuming the same treatment applies everywhere.