Topping off your bracket with a Roth Conversion

by Joe on September 19, 2012

Today, let’s look at one of the strategies where a Roth conversion makes good sense. You are single, retired, and currently taking your required minimum distributions. You find that your taxable income puts you at a marginal 15%. Back to the tax table –


Taxable income is
But not over The tax is Plus Of the amount
$0 8,700 $0.00 10% $0
8,700 35,350 870.00 15% 8,700
35,350 85,650 4,867.50 25% 35,350
85,650 178,650 17,442.50 28% 85,650
178,650 388,350 43,482.50 33% 178,650
388,350 112,683.50 35% 388,350


After deductions, your income is in the high $20K range. You’re looking at the required minimum distributions, in Publication 590, and see how at 75 you need to withdraw 4.4%, but by age 85, the percent you must withdraw creeps up to 6.8%, and hopefully, your account has grown as well. Ideally, you’d like to pay 15% on as much of your lifetime income as you can, and this method is a simple way to do that. During the year, convert a portion of your IRA to a Roth. A bit more than to hit the line from 15 to 25%, for 2012, we’re looking at $35,350. So if you think your taxable income will be $27,000, convert $10,000 of your IRA to Roth. In March, when you’re doing your taxes, you’ll have an exact number, and whatever amount you exceeded the $35,350 you will recharacterize back to the Traditional IRA. A bit of paperwork each year, but as time passes, you’ll see the Roth account growing and the Traditional IRA diminishing a bit so your RMDs won’t push you into the next bracket. Also, once the Roth is 5 years old, you are able to withdraw from that with no penalty or tax on any or all withdrawals, so if in any year, you have a large expense, you won’t have to withdraw from the Traditional IRA and get hit with a higher tax bill.

Any questions regarding this strategy? Please ask!

{ 8 comments… read them below or add one }

Dave September 20, 2012 at 6:14 am

Joe, what about taxation of social security benefits? Someone making RMDs would also likely be collecting SS meaning each dollar of conversion would trigger taxation of 50-85% of SS benefits at the same time. How do you factor that in?


joe September 20, 2012 at 8:45 am

Dave! You got it, sir. The subject of my next article.
I’ve written about the phase-in of the taxation of Social Security, so I do know better. There’s a woman I help with her taxes, and because of how teachers in my state are not part of the Social Security system, this doesn’t impact how we implement this strategy. For others, there’s some warning needed.


Cindy September 28, 2012 at 4:12 pm

Before I was laid off work 4 years ago, I was in the 25% tax bracket. With no earned income (only passive and small pension), I am not eligible for either Roth or traditional IRA contributions. I am now in the 15% tax bracket, so have been using these lower income years for bracket topping with Roth conversions. Luckily I had quite a bit of cash saved before layoffs with which to pay the conversion taxes, but figure that may run out about the time I turn 66. The state I live in taxes pension & retirement income (including IRAs) over $20,000. I am 62 but have not yet started taking Social Security or a small second pension. I figure I will be in the 25% tax bracket again when I do and that IRS will tax 85% of my Social Security when I do. If cash flow permits, I would like to take half my ex-spouse’s Social Security at 66 while letting my own SS benefit grow til 70. If not, then take my own Social Security benefit when cash flow is too small. Since I will end up in 25% tax bracket (or higher if Bush tax cuts expire) anyway, would I be better off doing larger Roth conversions now even if it would push me into a higher bracket? I figure around $17,000 conversion will top my 15% tax bracket in 2012, but would also start depleting my cash on hand faster. What are your thoughts?


joe September 28, 2012 at 4:26 pm

You are the ideal candidate for these partial conversions. See my latest Phantom Tax Rate article, where I chart the income that puts one into the Social Security taxable range. I like the idea of using the 15% bracket conversion to shift these funds to Roth, keeping just enough at retirement to not have your SS taxed.


Cindy September 25, 2013 at 1:41 pm

Well, it’s a year later and I’m 63. I did do a partial Roth conversion again last year. However, it is clear that even if I had enough cash on hand to pay the taxes on Roth conversions every year from now til 66, I have too much money in a traditional IRA to keep me within the 15% bracket from now to 66. It seems to grow faster than I convert it. Once I hit 66, I will be in the 25% tax bracket whether I do any conversions or not and 85% of SS will be taxed regardless. So the question is should I do larger conversions now even though it pushes me into 25% bracket rather than doing conversions after 66 when I’m taking partial Social Security (or full SS at 70). I’d be in the 25% bracket at 66 anyway, maybe 28% at 70.


Joe September 25, 2013 at 5:27 pm

Hi, Cindy.
There’s a bit of planning ahead here. If you are being pushed into the 25% bracket anyway, and this bracket runs right to $87,850 taxable in ’13, if you can convert each year, right till age 70, and once you collect Social Security, keep your (taxable) withdrawals plus social security under the $25K, the savings should be worth it. The chart is interesting, it shows the effect of taxable income as social security becomes taxable, and an incremental $10K can create an additional $4625 in tax due. I’d say it’s worth it to avoid this, and pay 25% now. If you use tax software, you can see the impact of the higher withdrawals or conversions on your total bill.

If you still have too much income, I’d suggest alternating years. Once the Social Security is taxed fully, you drop back to 25%, withdraw extra funds then, and in the next year, keep the withdrawal lower than the threshold of SS taxation. I hope this helped.


Honolulu Aunty June 19, 2013 at 1:23 pm

That is brilliant Joe! I look forward to learning more – Dave’s question intrigues me and your answer is eagerly anticipated!


Joe June 19, 2013 at 1:51 pm

Hi Aunty!
The answer comes in the next post – The Phantom Tax Rate Zone. Click on the title below to read it!


Leave a Comment

Previous post:

Next post: