Quick Read
Spreading a Roth IRA conversion over several years instead of all at once keeps more money taxed at lower federal rates.
Converting $500,000 over 5 years at $100,000 annually can save over $50,000 by staying in the 24% bracket versus the 35% bracket.
Smaller annual conversions also prevent Medicare premium surcharges and reduce Social Security benefit taxation, adding further financial upside.
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If you’ve built up a large traditional IRA or 401(k) balance, a Roth conversion could be one of the smartest tax moves you make. By converting your money to a Roth IRA, you can enjoy tax-free gains in your account plus tax-free withdrawals.
Just as importantly, Roth IRAs do not force savers to take required minimum distributions (RMDs). And avoiding those could be your ticket to keeping your taxes manageable.
But there’s a Roth conversion mistake that could cost you tens of thousands of dollars — converting too much in a single year.
The smarter way to do a Roth conversion
Many people assume they should try to do a Roth conversion as quickly as possible. While that strategy gets the taxes over with sooner, it can also push you into much higher federal tax brackets, dramatically increasing the amount you owe the IRS.
Remember, when you do a Roth conversion, every dollar you move into a Roth IRA is taxable that year. That’s because you were never taxed on that money when it went into your traditional retirement plan.
To avoid a huge tax hit, your best bet is generally to spread your Roth conversions over several years. That could make it possible to convert your money at lower tax rates.
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Staying in a lower tax bracket could save you tens of thousands
To understand why a years-long Roth conversion often makes sense, it’s important to understand how the tax code works. Federal income taxes are progressive, meaning each additional dollar of taxable income can be taxed at a higher rate once you cross into a new bracket.
