What time of year is best to do a Roth conversion? Early can mean more tax-free growth. Late can mean fewer surprises. Here's how to choose.
Executive Summary: The best time of year to do a Roth conversion depends on your goal. If you are converting a fixed dollar amount you are confident about, converting early in the year gives the money more time to grow tax-free. If you are converting up to a specific tax bracket or IRMAA threshold, waiting until late in the year lets you see your full income picture first. In both cases, leaving a cushion is a best practice.
If you are asking what time of year is best to do a Roth conversion, the answer comes down to one question: are you optimizing for growth or for accuracy? At Oak Road Wealth Management, a fee-only fiduciary financial planning firm in Lee's Summit, Missouri, serving clients nationally, we walk through this decision with clients every year. Below is how we think about it.
A Roth conversion moves money from a pre-tax account, such as a traditional IRA or 401(k), into a Roth IRA. You pay ordinary income tax on the converted amount in the year of the conversion. After that, the money grows tax-free and qualified withdrawals are tax-free.
Timing matters for two reasons. First, the sooner money lands in a Roth IRA, the longer it has to grow tax-free. Second, the conversion adds to your taxable income for the year, so it can push you into a higher tax bracket or trigger higher Medicare premiums if you do not plan carefully.
Converting earlier in the year is best when growth is your goal and you are confident in the dollar amount. If you have already decided on an amount that keeps you in a tax situation you are comfortable with, there is little reason to wait. Every month the money sits in a pre-tax account, its future growth stays exposed to ordinary income tax. Every month it sits in a Roth IRA, that growth is tax-free.
Here is a simple hypothetical. Say you convert $50,000 in January instead of December, and the market rises 8% over that year. The January conversion captures roughly $4,000 of growth inside the Roth IRA instead of the pre-tax account. This is an illustration, not a projection. Markets can also fall after a conversion, and since conversions cannot be undone, you would have paid tax on the higher value. Growth-focused timing works best for long-term investors who understand that trade-off.
This approach tends to fit people who:
Converting later in the year is best when accuracy is your goal, especially if you are converting up to a specific tax bracket or IRMAA threshold. If your plan is to fill the 12% bracket, or to stay under an IRMAA (Medicare surcharge) cliff, you need to know how much room you actually have. That depends on your full-year income, which is hard to know in January.
Waiting until the fourth quarter lets you see how your year played out. You can account for:
With a clearer picture, you can convert up to the line with much more precision. The trade-off is that the money has less time to grow in the Roth IRA.
Even with late-year timing, we recommend leaving a cushion
IRMAA is an income-related surcharge on Medicare Part B and Part D premiums, and a Roth conversion can push your income over an IRMAA threshold. IRMAA is based on your modified adjusted gross income (MAGI) from two years earlier, so a conversion this year can raise your Medicare premiums two years from now. IRMAA thresholds work like cliffs rather than gradual slopes, which is why precision matters so much for anyone age 63 or older.
If you are near a threshold, late-year timing is usually safer. It gives you the full-year income data you need to stay below the line, and a cushion gives you room for surprises.
We start with your goals and your comfort level, then recommend timing. There is no universal calendar date that works for everyone.
As a fee-only fiduciary, we are paid by our clients, not by commissions, so our timing recommendation is based on what fits your situation. We look at your projected income, tax bracket, RMD schedule, Medicare timeline, and how a conversion fits into your broader retirement plan before recommending when and how much to convert (if any at all).
It depends on your goal. Early in the year is best if you are converting a set dollar amount you are comfortable with, because the money has more time to grow tax-free. Late in the year is best if you are converting up to a tax bracket or IRMAA threshold, because you can see your full-year income first.
January gives your money more time to grow tax-free. December gives you more certainty about your income and tax bracket. If you know your conversion amount and are comfortable with the tax result, January usually has the growth advantage. If you are targeting a precise limit, December usually has the accuracy advantage.
A Roth conversion must be completed by December 31 to count for that tax year. Unlike IRA contributions, you cannot make a conversion for the prior year after the year ends, so year-end planning should start well before the last week of December.
No. Roth conversions are permanent and cannot be reversed. Since this is the case, leaving a cushion below your target bracket or IRMAA threshold is a smart safeguard.
It depends on your current and expected future tax rates, your timeline, your other income sources, and your goals. A Roth conversion often makes sense in lower-income years, such as the early years of retirement before RMDs and Social Security begin. It does not make sense for everyone, so it is worth modeling your numbers first.
This article is for educational purposes only and is not tax, legal, or investment advice. Tax rules and thresholds change, and every situation is different. Consult a qualified professional before making a Roth conversion decision.
Written by Andrew Matz, Financial Planner at Oak Road Wealth Management.
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