The Roth Conversion Window Most People Miss

Here's a situation we see all the time at Fox Hill:

You're 58. You just sold your business or left your corporate job. You have a year or two before you start drawing income again.

Your tax bracket just dropped from 35% to 22%.

This is your window.

Most people wait until they're 72 and forced to take RMDs. By then, their bracket is back up, Social Security is taxable, and Medicare premiums are higher.

The Roth conversion sweet spot is usually in your late 50s to early 60s—after income drops but before RMDs start.

Here's how to think about it.

The Conversion Math (With Real Numbers)

Let's say you have $500,000 in a traditional IRA. You're between jobs, and your taxable income this year will be just $60,000.

If you convert $50,000 to a Roth, you'll pay tax on it now at your current rate—roughly 22% federal, or about $11,000.

But here's the alternative: Wait until you're 72, start taking RMDs, and now you're converting while also drawing Social Security. That same $50,000 might push you into the 24% or even 32% bracket, costing you $12,000 to $16,000 in federal taxes. Plus, higher income could trigger IRMAA surcharges on Medicare—an extra $2,000+ per year.

The math gets even better when you consider growth. That $50,000 converted today could grow to $150,000 over 20 years—completely tax-free. If you waited and took it as RMDs, you'd pay tax on the entire $150,000 at whatever your bracket is then.

The key question: Will your tax rate be higher in retirement than it is right now?

For many of our clients in this transition window, the answer is yes.

Who Should Consider Roth Conversions

This strategy makes the most sense if you:

• Have a low-income year. You retired early, sold a business, or took time off. Your W-2 income dropped, creating tax bracket arbitrage.

• Have large pre-tax retirement accounts. The bigger your traditional IRA or 401(k), the bigger your future RMDs—and the higher your tax bill will be at 72.

• Expect higher taxes later. Maybe you'll have a pension kicking in, Social Security, rental income, or you simply believe tax rates are going up. (Spoiler: They probably are.)

• Want to reduce future RMDs. Every dollar you convert is one less dollar subject to required minimum distributions. This gives you more control over your taxable income in retirement.

• Care about your heirs. Inherited Roth IRAs grow tax-free for your beneficiaries. Inherited traditional IRAs? They'll pay ordinary income tax on every distribution.

Who Shouldn't Rush Into Conversions

Roth conversions don't make sense for everyone. You might want to hold off if:

• You'll be in a lower bracket in retirement. If you're a high earner now and expect significantly lower income later, paying tax at today's rate doesn't make sense.

• You'll need the money soon. Converted amounts need to season for five years to avoid penalties on earnings. If you'll need liquidity before then, think twice.

• You can't pay the tax from outside funds. Using IRA money to pay the conversion tax defeats the purpose. You want as much as possible growing tax-free.

• You're close to income cliffs. Conversions can push you into higher Medicare premiums (IRMAA), affect ACA subsidies, or trigger other income-based thresholds. These "stealth taxes" can overwhelm the conversion benefit.

State Tax Considerations

Don't forget state taxes in your conversion math.

If you live in California, New Jersey, or New York, you could be adding 5-10% in state tax on top of federal. But if you're planning to retire in Florida, Texas, or Nevada? Converting while you're still in a high-tax state could cost you dearly.

The strategy: Some people delay conversions until after they've moved to a no-income-tax state. If that's your plan, time it carefully—and make sure you've established true residency before converting.

Common Mistakes We See

• Converting too much at once. Don't convert so much that you vault into the next tax bracket. Smaller conversions over several years often beat one big one.

• Ignoring the five-year rule. Each conversion has its own five-year clock. Convert in 2025, and you can't touch that money penalty-free until 2030.

• Forgetting about estimated taxes. Conversions create taxable income. If you don't adjust your withholding or pay estimated taxes, you'll owe penalties.

• Triggering IRMAA unnecessarily. Medicare surcharges kick in at specific income levels. Sometimes converting $5,000 less keeps you under the threshold and saves $2,000 in premiums.

The Pro Rata Rule: The Gotcha You Need to Know

Here's where it gets tricky.

Let's say you have $400,000 in a traditional IRA and $100,000 in after-tax contributions (non-deductible IRA contributions). You want to convert just the $100,000 to Roth tax-free, since you already paid tax on it.

Doesn't work that way.

The IRS treats all your traditional IRAs as one bucket. In this example, 20% of your total IRA is after-tax ($100k/$500k). So if you convert $100,000, only $20,000 is tax-free. The other $80,000 is taxable.

This trips people up constantly. The workaround? If your 401(k) plan accepts rollovers, you can move the pre-tax IRA money into the 401(k), leaving only after-tax dollars in the IRA. Then convert that clean. It's called the "backdoor Roth" when done this way, and it requires careful sequencing.

How to Time Your Conversions

The best conversion years are usually:

• Early retirement, before Social Security. You've stopped working, but you're not drawing Social Security yet. Income is low, and you control your tax bracket completely.

• After selling a business or property. You might have a spike year with capital gains—avoid converting then. But the year after, when income normalizes, could be perfect.

• Before RMDs start. Once you hit 73 (current RMD age), you lose control. Conversions get layered on top of required distributions, pushing you higher.

• When tax rates are favorable. We're currently in a historically low tax environment. Rates are scheduled to increase in 2026 unless Congress acts. Converting before rates rise locks in today's lower brackets.

A strategic approach: Spread conversions over multiple years, filling up lower brackets without spilling into higher ones. Your advisor can model this year by year, showing exactly how much to convert to maximize tax efficiency.

The Bottom Line

Roth conversions aren't for everyone. But if you're in that sweet spot (between career income and retirement distributions) the math can be compelling.

The mistake most people make isn't converting too much. It's waiting too long and missing the window entirely.

At Fox Hill Wealth Management, we help clients navigate complex decisions like Roth conversions as part of comprehensive financial planning. If you'd like to explore whether this strategy makes sense for your situation, schedule a conversation with our team.

This article is for educational purposes only and should not be considered tax or investment advice. Fox Hill Wealth

Management manages investments on behalf of our clients and provides integrated financial planning. Individual results will vary based on personal circumstances. Consult with a qualified tax professional before making conversion decisions.