Tax season is upon us, and clients and financial professionals are focusing on ways to reduce taxes. Roth conversions often figure prominently in such conversations. As RMD ages are being pushed later, should retirees take full advantage of the extra years of tax-deferral and forgo Roth conversions?

Generally, yes, if their taxes won’t be higher in the future. But beware, many factors can unexpectedly increase the amount of taxes owed, including:

•  The Tax Cuts and Jobs Act is set to expire after 2025, which means higher tax rates for many individuals.
•  An aging population is likely to put further pressure on the federal budget in the future; this may result in an increase in tax rates.
• Personal events, such as losing a spouse, gaining an inheritance or taking RMDs from tax-deferred accounts can bump a client into a higher tax bracket.
•  Taxation of Social Security benefits and Medicare surcharges (see Exhibit 1) can also be a factor: Lower-income workers may find withdrawals from retirement accounts make the taxes on their Social Security benefits jump dramatically, while those with relatively high income in retirement may face Medicare surcharges. (For the 2024 tax season, this includes single filers with a modified adjusted gross income [MAGI] of more than $103,000, and joint filers with a MAGI of more than $206,000.)¹
• RMDs on a tax-deferred account will trigger more in Medicare surcharges for a single filer than for a couple—which may have implications for a surviving spouse.

As you advise your clients, also take into consideration:

• Some individuals will be in a relatively high tax bracket early in retirement due to a working spouse, so the timing should be considered at the household level.
• If a client’s Roth and taxable accounts are likely to be depleted during their lifetime—leaving only tax-deferred accounts—a conversion may help them avoid ordinary incomes taxes on those assets, giving them more control over their tax situation late in life.
• A conversion might be beneficial for clients who have some lower-income years. This may be the case if conversions are made annually before the start of Social Security benefits.
• Legacy goals may be an influencing factor. For example, conversions can be a way to pre-pay taxes for high-income children who will inherit their parents’ retirement accounts. Conversely, if a beneficiary will have lower taxes than a retiree, that might be a reason not to do a conversion.
• Pitfalls can have a surprising impact on a retiree’s finances, such as conversion amounts that trigger Medicare surcharges or limit subsidies for Affordable Care Act (ACA) health insurance policies.²
• Consulting with your client’s tax advisor can help determine the amount of a conversion to stay under a given tax bracket and provide a more complete understanding of the client’s overall tax situation.

Overall, Roth conversions can be a great way for newly retired clients to have more control of their tax situation late in life, especially those who didn’t have access to Roth accounts when they were young.  However, conversion is not a one size fits all strategy. Careful consideration in partnership with your client’s tax advisor can help you provide valuable advice this tax season.

¹ Modified Adjusted Gross Income (MAGI) for purposes of calculating Medicare surcharges is Adjusted Gross Income (AGI) plus tax-exempt interest income.

² The latest tax return available may be used when determining a subsidy or income threshold. Medicare surcharges generally are determined using figures in the tax return from two years prior to the year they are assessed. If income is lower due to retirement, that may be taken into consideration if the client applies for an exception to the Medicare surcharge. However, an asset sale or Roth conversion is not an exception.

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