Roth conversions in a down year: how to time the trigger

A Roth conversion is one of the most powerful — and most under-used — tax-planning tools available to retirement savers. The mechanic is straightforward: move money from a pre-tax account (Traditional IRA, 401(k), 403(b)) into a Roth IRA, and pay ordinary income tax on the converted amount in the year you do it.

Why would you voluntarily accelerate a tax bill? Because once the money is in the Roth, every dollar of future growth is tax-free, future withdrawals are tax-free, and there are no required minimum distributions. The strategy works whenever your current tax rate is lower than the rate you expect to pay on the same dollars later.

What "down year" means here

The biggest variable in Roth conversion math is the marginal tax rate you pay on the conversion. Convert $50,000 at 12% and the tax bill is $6,000; convert the same $50,000 at 32% and the bill is $16,000. The same withdrawal in retirement gets the same tax treatment either way — so you want to do conversions in your lowest-rate years.

Common "down years" worth targeting:

• Early retirement gap. The years between leaving the workforce and starting Social Security or RMDs are often the lowest-income years of an entire adult life. This is the single most valuable conversion window.
• Sabbatical, parental leave, or job transition. A year with reduced earned income can drop you a full bracket or two.
• A business down year. Net operating losses or a slow year of self-employment income can free up bracket capacity.
• A market drop. When account values are temporarily depressed, you convert more shares for the same tax bill — and the recovery happens inside the Roth.

How to size a conversion

Don't think "I'll convert $X." Instead, think "I'll convert up to the top of my current tax bracket." That way you maximize the conversion without spilling into a higher rate.

For a 2025 married filing joint return, the bracket thresholds (taxable income) are:

• 10% bracket: up to $23,850
• 12% bracket: $23,851 – $96,950
• 22% bracket: $96,951 – $206,700
• 24% bracket: $206,701 – $394,600

If your taxable income before conversion is $80,000, you have about $17,000 of "12% bracket headroom" before crossing into 22%. Converting $17,000 costs roughly $2,040 in federal tax — a great deal compared to converting later at higher rates.

The five-year rule (two of them, actually)

Roth conversions come with a holding requirement. Each conversion has its own 5-year clock for purposes of avoiding the 10% early-withdrawal penalty on the converted principal — separate from the 5-year rule for tax-free earnings on regular Roth contributions.

Practical implication: if you might need the converted dollars within five years, conversion may not be the right move. For most retirees, this isn't a constraint — but for someone in their 40s converting heavily, the timing matters.

The pro-rata rule (watch out)

If you have any pre-tax money in a Traditional IRA — including SEP and SIMPLE IRAs — and you try to do a "backdoor Roth" by contributing to a non-deductible IRA and then converting, the IRS treats every conversion as a proportional mix of pre-tax and after-tax money. You can't just convert the after-tax dollars cleanly.

The fix is to roll all pre-tax IRA balances into a 401(k) before doing the backdoor (since 401(k) balances are excluded from the calculation). This needs to happen by December 31 of the year of the conversion.

Watch the secondary effects

A large conversion increases your AGI for the year, which can trigger:

• Medicare IRMAA surcharges — higher Part B and Part D premiums two years later, based on the MAGI from your conversion year.
• Additional taxation of Social Security benefits.
• Net Investment Income Tax (NIIT) exposure on other investment income above $200,000 single / $250,000 MFJ.
• Capital gains rate creep — pushing long-term gains from the 0% to the 15% bracket, or the 15% to 20%.
• Loss of ACA premium tax credits if you're under 65 and on a marketplace plan.

Each of these has thresholds. A good conversion plan models them all rather than focusing solely on the federal income tax on the conversion itself.

The deadline that catches people

Roth conversions must be completed by December 31 of the year you want them to count. Unlike IRA contributions, you can't go back after year-end and do one for the prior year. Once January 1 hits, the opportunity is gone.

The bottom line

Roth conversions are a pay-now, save-later trade. They're most valuable when current tax rates are temporarily low, when you have decades of future tax-free growth ahead of you, and when you don't need to access the converted funds for at least five years.

If you're approaching retirement, considering one, or just curious whether your situation is a fit, let's talk. We can model the conversion alongside your other income and identify the right amount before year-end.

This article is general information, not personalized tax or investment advice. Roth conversions involve trade-offs and irreversible tax consequences. Always consult a tax professional before converting.