Each April, Americans, or someone they hire, work through income tax forms, fill in totals from their financial records and send the results to the IRS.
The goal is usually simple: Pay as little to the federal government as legally possible so you can keep more of your hard-earned money.
But what if paying more in taxes today could leave you with more money tomorrow? What if voluntarily paying additional taxes now could reduce the amount you and your family pay over your lifetime?
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Opportunities like these are rarely discovered while filling out tax forms in April. Effective tax planning must be part of a broader retirement strategy that considers income sources, future tax rates, healthcare costs, estate planning goals and the rules governing retirement accounts.
Many people use Roth conversions to reduce their lifetime tax burden. While the objective is often to pay less tax over the long run, the process often results in paying more tax in the short run, but that may be exactly what your long-term financial plan needs.
In other words, you intentionally elect to pay more tax today in exchange for the potential of a smaller tax bill later.
When implemented correctly, a Roth conversion allows you to pay taxes on your terms, at a rate you find acceptable, rather than taking a chance on future tax laws and rates at a time of the IRS’ choosing. If implemented incorrectly, however, it may cost you more than you expected.
The silent partner
Imagine going into a business partnership where you provide all the capital, do all the work, take all the risk and spend years building something valuable. Then, when the time finally comes to enjoy the rewards, your partner suddenly appears and tells you how much of the business belongs to them.
No rational person would willingly enter into that kind of arrangement. Yet people all across America do something very similar through tax-deferred retirement accounts.
They contribute the money. They assume the investment risk. They watch their balance climb over decades and mentally count that balance as part of their retirement nest egg. The problem is that they don’t know how much belongs to them until they begin taking withdrawals. At that moment, the IRS steps in and determines how much it gets to keep.
This is where a Roth account comes into the picture. Money placed in a Roth account grows tax-free, and qualified withdrawals in retirement are generally free from federal income tax because the taxes were paid before the money entered the account.
Many investors consider converting a portion of their tax-deferred accounts into a Roth account. The process is relatively straightforward: Money is transferred from a tax-deferred account into a Roth account.
However, when you make the conversion, you must pay income tax on the amount being converted.
At first glance, that may sound counterproductive. Why would anyone voluntarily create a larger tax bill? The answer is simple: You may be exchanging a known tax bill today for a potentially larger and less predictable tax bill in the future.
Roth assets can also create meaningful tax advantages for beneficiaries who may inherit those accounts.
When should you convert?
While Roth conversions may benefit many people preparing for retirement, it is not always advisable to convert all of the funds held in tax-deferred accounts. Maintaining tax diversification can be just as important as maintaining a diversified investment portfolio, yet it is often overlooked in traditional retirement planning.
Using the tax code efficiently later in life may require a blend of income sources, including taxable income, long-term capital gains, dividend income and Roth income.
I have seen situations where aggressively converting every available dollar to a Roth account has cost a retired couple nearly as much as if they had never converted at all. They lost opportunities to strategically fill lower tax brackets later in retirement and paid substantially more than necessary.
This highlights an important point: A Roth conversion is not the goal. The goal is to create the most efficient retirement income strategy possible. The rules surrounding Roth conversions can be complex, but the decision should be evaluated within the context of your overall retirement strategy.
At R.D. Smothers (RDS) Wealth, we encourage clients to begin by estimating their expected income for the year and determining how much room they have available within their current tax bracket.
Lower-income years can present some of the best opportunities for Roth conversions because they allow you to convert more assets while potentially remaining in a favorable tax bracket.
Taxes are only one piece of the equation. A well-designed Roth conversion strategy should also account for Medicare premium surcharges, commonly known as IRMAA, future healthcare expenses, estate planning objectives and the income needs of both you and your beneficiaries.
How much should you convert? Understanding the tax fountain and your ‘Opportunity Zone’
This brings me to an important point about understanding your own unique relationship with the tax code. After all, the tax code is how your silent partner ultimately determines how much of your money you get to keep and how much they get to take.
Many retirees spend decades building wealth without fully understanding how that partnership works. Failing to understand the tax code will likely cost you at some point in retirement, whether through unnecessary taxes, Medicare surcharges, inefficient withdrawals or missed planning opportunities.
What makes this even more challenging is that the tax code you retire under may not be the same tax code you die under. I often tell clients that the tax code is written in pencil, not ink. Congress can change it, modify it or rewrite portions of it at any time. That’s why successful tax planning requires ongoing adjustments as your circumstances and the tax laws evolve.
If you want to use Roth conversions to help manage your future tax burden, understanding tax brackets is essential. Before you can determine whether a Roth conversion makes sense, you need to understand how much of a conversion may be appropriate.
At RDS Wealth, we often refer to this as identifying your “Opportunity Zone.” This is the portion of the tax code where additional income can potentially be recognized at rates that may be favorable relative to what you might pay in the future.
The U.S. tax code contains seven federal income tax brackets, ranging from 10% to 37%. Many people assume that if they fall into the 22% tax bracket, all of their income is taxed at 22%. That’s not the case. Each bracket applies only to a specific portion of your income.
For example, in 2026, a married couple filing jointly receives a standard deduction of $32,200. Let’s say the same couple has a gross income of $165,000 and no other deductions or credits. Their taxable income would be $132,800. They are squarely in the 22% tax bracket, but they will not pay 22% federal income tax on all of their money.
They will pay 22% federal income tax on only about $32,000 of their taxable income. When we look at this through the lens of Roth conversion planning, something interesting begins to emerge.
One way to grasp how the brackets work is to imagine them as a multitiered fountain. Each year, you pour all of your income into the top of the fountain.
The first tier to fill is the deduction bucket. No tax is paid on any income that lands in this bucket. Once that bucket is full, income spills into the 10% tier. Every dollar that lands there is taxed at 10%. The water then overflows into the 12% tier, then the 22% tier and eventually into higher tiers as more income is added.
In the example of the married couple earning $165,000, their income fills the lower tiers and then partially fills the 22% tier. Because they have not yet reached the top of that bracket, a portion of the 22% tier remains empty.
The empty space remaining in that tier is what we call the Opportunity Zone. It’s the amount of income you may be able to recognize before spilling over into the next tax bracket.
In this example, the Opportunity Zone represents more than $78,000 of available space. That doesn’t mean this couple should convert the entire amount, but it does mean they have room available to recognize additional income at a known tax rate rather than waiting until later when tax rates may be higher.
This is where Roth conversion planning becomes so powerful. If appropriate for your situation, you may be able to convert enough money to fill the remainder of that tier without spilling into the next bracket.
In doing so, you knowingly pay tax on those dollars today, move them into a Roth account and potentially allow future growth to occur in a tax-free environment.
The fact that you paid tax on the conversion means your tax bill may be higher this year than it otherwise would have been. However, if executed properly, that higher tax bill today may result in substantially lower taxes over the lifetime of the account.
Again, the goal of a Roth conversion is to pay a known and acceptable rate of tax while strategically reducing the future claim your silent partner has on your retirement assets.
The goal is not to eliminate taxes. The goal is to choose when you pay them. The families who often benefit most from Roth conversions are those who proactively manage their tax brackets rather than allowing future tax laws and required distributions to blindly manage it for them.
Ronnie Blair contributed to this article.
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