5 Tests Before a Roth Conversion Ladder
5 Tests to Run BeforeBuilding a Roth Conversion Ladder
For couples retiring in theirearly 60s with large traditional 401(k) or IRA balances and little to no Rothmoney, a Roth conversion ladder—converting a portion of traditional retirementfunds to Roth over a series of years—can be an appealing strategy. But beforecommitting to a multi-year conversion plan, it's worth running the idea throughfive tests first.
Test 1: What's Your Tax RateToday vs. Later?
The core logic of a Rothconversion is paying tax now at a rate you expect to be lower than the rateyou'd otherwise pay later. That means looking beyond this year's bracket toconsider what tax rate applies once required minimum distributions (RMDs) begin,and importantly, what happens after the first spouse passes away and thesurvivor moves from filing jointly to filing as a single taxpayer—often pushingthem into a higher bracket on a smaller income. A conversion strategy that onlylooks at today's bracket without modeling these future scenarios can miss thebigger picture entirely.
Test 2: What's the Impact onACA Marketplace Subsidies?
For a couple retiring before 65and relying on ACA marketplace health insurance, income matters a great deal—itdirectly determines the size of the premium subsidy they receive. A Rothconversion adds to taxable income in the year it happens, which can reduce oreliminate that subsidy. The extra tax savings from a conversion can be easilyoutweighed by a much larger increase in health insurance premiums if this isn'tchecked first.
Test 3: What's the Impact onIRMAA and Medicare Premiums?
Once Medicare begins at 65,income again plays a direct role—this time through IRMAA, the Income-RelatedMonthly Adjustment Amount, which increases Medicare Part B and Part D premiumsfor higher earners. Because IRMAA is based on a two-year lookback, a largeconversion at 63 can mean a Medicare premium surcharge at 65. Any conversionladder needs to be planned with this two-year delay in mind, not just theimmediate tax bill.
Test 4: How Does ThisInteract with Social Security Taxation?
Up to 85% of Social Securitybenefits can become taxable depending on overall income, and a Roth conversionis exactly the kind of extra income that can push more of a benefit intotaxable territory. For couples who have already started Social Security, or areplanning to soon, testing how a conversion affects the taxation of thosebenefits is an important piece of the puzzle—one that's easy to overlook whenfocused only on the conversion's direct tax cost.
Test 5: Who Is This MoneyActually For?
The last test is less about thenumbers and more about intent: who ultimately receives this money? If thetraditional retirement account is likely to pass to non-spouse beneficiaries,such as adult children, the 10-year inherited IRA distribution rule matters.That rule often forces beneficiaries to withdraw the full account within adecade—frequently during their own peak-earning years, when they're in a hightax bracket. In that case, converting to Roth now, while the original ownersmay be in a lower bracket, can save the family real money over time. On theother hand, if the intent is to leave pre-tax assets to charity, those assetspass tax-exempt to a qualified charity regardless of their pre-tax status—whichcan mean a Roth conversion isn't necessary for that portion of the estate atall.
Building the Ladder
A Roth conversion ladder isn'ta single decision—it's a multi-year strategy that needs to be re-evaluatedregularly as tax law, account balances, health insurance status, and familycircumstances change. Running it through these five tests before gettingstarted—and again each year as the ladder progresses—helps ensure the strategyis actually accomplishing what it's meant to, rather than creating unintendedcosts elsewhere.
At Cornerstone Wealth Planning,we help clients model out exactly these kinds of multi-year conversionstrategies, weighing the tax savings against the health insurance and Medicarecosts, and against who the money is ultimately meant for.
Whether you're located inCharlotte, NC or anywhere across the country, our team is ready to help youevaluate a Roth conversion ladder on the way to a peaceful and purposefulretirement. Contact us today to schedule a conversation.