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The early years of retirement can create a unique planning opportunity before required minimum distributions (RMDs) begin. A Roth conversion allows you to pay taxes now in exchange for tax-free growth and withdrawals later, while avoiding future RMDs. Whether a Roth conversion makes sense for you depends on your current tax bracket, expected retirement income, financial goals, and legacy plans.

In this episode of Money Wisdom, Nicholas J. Colantuono, CFP® and Eric Hogarth, CFP® explain how a thoughtful Roth conversion strategy may create more flexibility in retirement.

The Roth Conversion Window Before RMDs

One of the most valuable opportunities for Roth conversions often occurs during a specific window of time. After you stop working but before RMDs begin, your taxable income is typically lower. During that period, Roth conversions can potentially reduce future taxes. The goal is to move money into a tax-free environment while tax rates may be more favorable.

Whether a Roth conversion makes sense for you depends on several key factors, including your tax bracket today and in the future. You also must consider how much of your savings are in pre-tax accounts. Many retirees have most of their wealth in tax-deferred 401(k)s and IRAs. Because each withdrawal counts as taxable income, those distributions may impact Social Security taxation, capital gains rates, and even Medicare premiums.

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Why Have the Roth Conversion Conversation

Many people hesitate to do Roth conversions because they don’t want to pay taxes right now. But avoiding taxes just postpones them. If tax rates rise in the future, your future tax bill may be even larger. The tradeoff is you pay taxes at today’s rates in exchange for future tax-free money.

Keep in mind, Roth conversions don’t make sense for everyone, especially for those still working. If you’re in a higher tax bracket than you expect to be in during retirement, it may make sense to wait. But no matter where you are today, it’s worth having the conversation.

Another reason to consider Roth conversions is that RMDs can push you into higher tax brackets later in life. RMDs increase taxable income whether you need the money or not. If you have time before RMDs begin, performing strategic Roth conversions may be the right move.

How Roth Conversions Build Tax Flexibility

Roth accounts provide tax-free money that you can use later in retirement without increasing your taxable income. That flexibility can help you manage taxes, Medicare premiums, and unexpected expenses.

As a long-term strategy, Roth conversions typically work best when the converted funds remain invested for many years. Rather than converting a large lump sum, it may be wise to spread conversions over several years leading up to your RMD age.

The Legacy Benefits of Roth Conversions

Another major benefit of Roth conversions is legacy planning. Under current rules, most beneficiaries must withdraw inherited retirement accounts within 10 years. If inherited funds come from a traditional IRA, those withdrawals may create a significant tax burden for heirs.

While inherited Roth accounts are still subject to the 10-year rule, qualified withdrawals remain tax-free. From a legacy standpoint, this can make Roth assets far more efficient for passing down wealth to your children or grandchildren.