The strategy could be considered filling the targeted marginal tax rate bucket. Looking at the table above, a married couple filing jointly with $150,000 in taxable income could convert $61,400 and still stay within the 22% bracket. Future growth on that conversion would be tax free. It comes down to paying 22% now, versus potentially paying a higher rate later.
This conversation tends to be most relevant at certain points in life. Retirement is the obvious one, particularly the early years before Social Security income and RMDs both kick in, because that window often gives people more control over their taxable income than they've had in decades. A significant job change or sabbatical year can create the same opportunity. If your income is going to be meaningfully lower than usual, that's a year to look at this seriously.
Where it gets more nuanced is in the details, and this is where I spend most of my time in these conversations. The goal isn't just to stay within a certain tax bracket. Medicare premiums are calculated based on income from two years prior, and there are thresholds that, if crossed by even a small amount, can increase what you're paying each month. I recently worked through this with a client and found that pulling out roughly $38,000 made sense. Fifty thousand would have kept her in the same tax bracket, but it would have increased her Medicare premiums. The tax impact and the Medicare impact were both manageable on their own, but looking at them side by side is what showed $38,000 was the number that avoided the Medicare increase while staying in the same bracket. Those are the kinds of details that are easy to miss when someone makes a round-number decision in December without looking at the full picture, and they're the kind of thing your tax and financial team should be sorting out together.
For clients who are charitably inclined, the calculus shifts again. A Qualified Charitable Distribution (QCD) can satisfy all or a part of your RMD requirement without the distribution counting as taxable income. But in some cases, even after accounting for the QCD and the full RMD, there's still room left in a lower bracket, and converting additional dollars on top of that helps chip away at the pre-tax balance over time. The idea is to steadily reduce future RMDs while paying a known, lower tax rate today, rather than risking a higher bracket five or ten years down the road when you have less flexibility to do anything about it.
There is no universal answer here. Whether a conversion makes sense depends on your unique situation and goals, and how it fits into your broader plan. But strategizing in July rather than December gives us time to look at the full picture carefully, run the real numbers, and coordinate with your CPA before year-end. I'm glad to loop in directly with your CPA so we're working from the same numbers. Take a look at our piece on how tax and financial advisor coordination works, and let me know if you'd like me to reach out to your CPA directly.
