Using Roth Conversions to Add Value to Higher-Income Retirees’ Financial Portfolios

Journal of Financial Planning: February 2020


Executive Summary

  • This study shows how financial advisers can add value to higher-income households by recommending Roth conversion strategies before required minimum distributions (RMDs) begin and before tax rates are scheduled to increase in 2026.
  • In general, higher-income households (for the purposes of this paper) have incomes that are too high to avoid paying taxes on less than 85 percent of Social Security benefits if they follow the conventional wisdom withdrawal strategy, but their incomes are
  • high enough that they should consider how the withdrawal strategy from their financial portfolio will affect the size of their Medicare premiums.
  • This study demonstrates how the taxation of Social Security benefits causes taxpayers to pay marginal tax rates within a wide income range that is 150 percent or 185 percent of their tax brackets. It then explains that increases in income-based Medicare premiums can cause spikes in higher-income households’ marginal tax rates.
  • Two cases demonstrate the steps higher-income households can take to lower the size of their lifetime income taxes and the
  • size of their lifetime Medicare premiums. Ultimately, higher-income households should consider making Roth conversions in their first few retirement years, before RMDS begin, and before tax rates are scheduled to increase in 2026.

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Retirement Savings and Income Planning