Save over $1 Million in taxes with Roth Conversions

In this post we walk through how a strategic Roth conversion plan can save a household with a large IRA well over $1,000,000 in taxes. If you hold a sizable traditional IRA, the combination of required minimum distributions (RMDs), higher taxable income, Social Security taxation, and Medicare premium surcharges can turn taxes into one of your biggest lifetime expenses. Below we explain the problem, the mechanics of the solution, a real-world example, common mistakes to avoid, and practical next steps with roth conversions.

The problem: the IRA “tax trap”

IRAs are powerful because they grow tax-deferred, but that same deferral creates a looming tax burden later. Key forces that turn IRAs into a tax trap:

• Required Minimum Distributions (RMDs): Under current law RMDs start at age 73 and force taxable withdrawals whether you need the cash or not.
• Bracket creep: Large RMDs boost taxable income and push retirees into higher tax brackets.
• Social Security taxation: Higher reported income can cause up to 85% of benefits to become taxable.
• Medicare IRMAA surcharges: Higher reported income triggers higher Part B and D premiums.

Left unaddressed, these layers combine and compound, creating enormous lifetime tax drag on your net worth.

Real-world example: how we saved $1.5M+

We recently worked with a couple — ages 65 and 63 — who had about $1.75 million in traditional IRAs. Projected RMDs over their lifetimes were roughly $3.7 million. With a properly executed Roth conversion strategy they were able to dramatically change the outcome.

• By converting their IRAs strategically, their lifetime taxable RMDs dropped from $3.7 million to under $50,000 of reported taxable RMD income.
• The conversions lowered the amount of Social Security subject to tax, reducing lifetime taxation on benefits.
• They avoided IRMAA surcharges, which reduced Medicare premiums by about $200,000 over their lifetimes (an important, non-tax cash savings).
• Their heirs will inherit Roth assets that are tax-free, saving the family an estimated $875,000 in taxes after the couple passes.
• All told, including lifetime taxes and the estate tax benefit to heirs, total tax savings were a little over $1.5 million.

Put simply: moving pre-tax IRA balances into a Roth over time can convert large, taxable future distributions into tax-free growth and distributions, saving both the account owners and their heirs substantial amounts.

How these savings actually happen

The tax savings from Roth conversions come from several interacting mechanisms:

• Lower future RMDs: Converted assets no longer produce taxable RMDs, so future required withdrawals are much smaller or nonexistent.
• Reduced Social Security taxation: Lower reported income reduces the portion of Social Security that is taxed.
• Lower Medicare premiums (IRMAA): Medicare surcharges are based on reported income; by smoothing or reducing that income we can avoid steep premium increases.
• Tax-free legacy: Heirs inheriting Roth IRAs receive distributions free of income tax, which can be a huge estate planning benefit.

Common mistakes we see (and how to avoid them)

Many investors miss out on the benefits of roth conversions because of avoidable planning errors:

• Waiting too long: Delaying conversions into your 70s often means larger RMDs and a bigger conversion balance later. Starting earlier usually gives more flexibility and lower marginal tax rates over time.
• Converting only to the top of the current bracket: This narrow rule-of-thumb isn’t always optimal because it ignores future Medicare, Social Security, and estate-tax interactions.
• Paying conversion taxes from IRA funds: When you have taxable brokerage (non-qualified) accounts available, using those after-tax funds to pay conversion taxes is often better. Why? Capital gains are taxed at lower rates (max long-term rate typically 20%) compared to ordinary income rates on withdrawals from IRAs. Preserving IRA principal in the Roth yields greater long-term tax-free growth.
• Ignoring Medicare IRMAA: Overlooking how conversions affect Medicare premiums can cost tens or hundreds of thousands over a lifetime.
• Failing to coordinate charitable giving: If you’re charitably inclined, combining charitable strategies (like Qualified Charitable Distributions, donor-advised fund front-loading, or bunching deductions) with conversions can drastically improve tax outcomes. These tactics deserve coordinated planning.

Practical conversion strategy checklist

1. Run a lifetime tax projection that includes RMDs, Social Security taxation, and Medicare IRMAA effects — not just current tax brackets.
2. Identify which accounts can pay conversion taxes most tax-efficiently (brokerage vs. IRA).
3. Convert in smaller, planned chunks over multiple years to minimize bracket shocks and IRMAA triggers.
4. Coordinate Roth conversions with charitable giving if you make significant gifts.
5. Revisit and adapt the plan regularly as tax laws, income, and balances change.

Quote to remember

“Without a strategy, taxes can be one of your biggest expenses.”

Frequently asked questions

Q: What exactly is a Roth conversion?

A: A Roth conversion is the process of moving funds from a pre-tax retirement account (like a traditional IRA) into a Roth IRA. You pay ordinary income tax on the converted amount in the year of conversion and then enjoy tax-free growth and tax-free withdrawals from the Roth (subject to Roth rules).

Q: When should we start converting?

A: Sooner is usually better. Starting conversions in your 60s or early retirement years often gives you the most flexibility to manage your tax brackets, Social Security taxation, and Medicare IRMAA. Waiting typically makes the conversion task larger and costlier.

Q: Should we pay conversion taxes from the IRA or from our brokerage account?

A: If you have taxable brokerage funds, using those to pay conversion taxes is often advantageous. That preserves IRA principal to become Roth principal (tax-free later), and long-term capital gains rates on brokerage withdrawals are usually lower than ordinary income tax rates.

Q: How will conversions affect our Social Security and Medicare?

A: Conversions increase reported income in the conversion year, which can temporarily affect the taxation of Social Security and potentially trigger higher Medicare premiums in the short term. That’s why staged conversions and careful year-by-year planning matter — to avoid large IRMAA impacts and to reduce long-term taxation of Social Security.

Q: What about leaving money to heirs?

A: Roth IRAs provide tax-free distributions to beneficiaries, which can be a major estate planning advantage. In our example, heirs were projected to save about $875,000 in taxes by inheriting Roth assets rather than traditional IRA balances.

Q: Do conversions make sense if we plan to give money to charity?

A: Yes — charitable giving and Roth conversions can be coordinated to maximize deductions and reduce taxable income in strategic years. Techniques like Qualified Charitable Distributions, donor-advised fund bunching, or charitable trusts may be part of the optimal plan.

Conclusion — act now, plan broadly

Roth conversions aren’t just a tax maneuver; they’re a tool to maximize tax-adjusted net worth, preserve retirement flexibility, and create a tax-free legacy. For people with large traditional IRAs, the costs of inaction can be enormous. We encourage you to run a full, multi-year analysis that includes RMDs, Social Security, and Medicare impacts before settling on a conversion plan. Start sooner rather than later, coordinate across accounts, and keep the big picture in view — the potential savings can be life-changing.

If you’d like practical resources to get started, we provide free guides and tools that walk through conversion planning and common pitfalls. Thoughtful, proactive planning can keep more of your hard-earned money in your pocket — not at the taxman’s doorstep.