Year-End Roth Conversion Strategy Planning

The final weeks of December create a narrow window for one of the most impactful retirement planning moves available. Roth conversions-transferring funds from traditional IRAs or 401(k)s into Roth accounts-must be completed by December 31 to count for that tax year. Miss the deadline by even a day, and the opportunity vanishes for twelve months.

But timing alone doesn’t make a conversion smart. The real question: does converting make sense given your specific tax situation this year?

The Tax Arbitrage Opportunity

Roth conversions work best when investors pay taxes at a lower rate today than they expect to pay in retirement. Simple concept, tricky execution.

Consider the math. A married couple in the 22% federal bracket converts $50,000 from a traditional IRA. They’ll owe $11,000 in federal taxes on that conversion. If they’d withdrawn those same funds in retirement while in the 24% or 32% bracket, they’d pay $12,000 to $16,000 instead. The conversion saves $1,000 to $5,000 in taxes-and that’s before accounting for decades of tax-free growth.

The 2024 tax brackets make this analysis concrete:

• 10% bracket: up to $23,200 (married filing jointly)
• 12% bracket: $23,201 to $94,300
• 22% bracket: $94,301 to $201,050
• 24% bracket: $201,051 to $383,900

Year-end planning focuses on “filling up” lower brackets. Someone with $80,000 in taxable income has $14,300 of room left in the 12% bracket and another $106,750 in the 22% bracket. Converting $121,050 would use all that space without pushing into the 24% bracket.

Timing Considerations That Actually Matter

December conversions carry specific risks that November or October conversions don’t. Brokerage firms face massive year-end volume. Fidelity, Schwab, and Vanguard all report processing delays during the final two weeks of December. A conversion request submitted December 28 might not complete until January 3-putting it in the wrong tax year entirely.

The IRS uses the transaction date, not the request date. Most advisors recommend completing conversions by December 15 at the latest. Some push that deadline to December 20 for established accounts at major brokerages. But December 28 - that’s gambling.

Another timing factor: estimating final income accurately. Bonuses, capital gains distributions from mutual funds, freelance income-these all affect optimal conversion amounts. Mutual fund capital gains distributions typically get announced in late November or early December. Waiting for that information makes sense. Waiting until December 26 doesn’t.

Income Variables to Calculate Before Converting

Year-end conversions require near-final income figures. The calculation includes:

W-2 income: Usually predictable by December. Check final pay stubs for overtime, bonuses, or commission payments.

Investment income: Dividends, interest, and capital gains from taxable accounts. Mutual fund distributions get announced in November/December-check fund company websites directly.

Side income: Self-employment, rental properties, gig work. Many taxpayers underestimate these sources.

Social Security: 85% of benefits may be taxable depending on combined income.

Required Minimum Distributions: RMDs from traditional accounts must be taken before any Roth conversion from that account. Converting without first taking the RMD creates excess contribution problems.

A 2023 Vanguard study found that 23% of investors who attempted Roth conversions encountered unexpected tax consequences. The primary cause: failing to account for all income sources before converting.

The IRMAA Trap

Medicare’s Income-Related Monthly Adjustment Amount catches many retirees off guard. IRMAA uses modified adjusted gross income from two years before set current Medicare Part B and D premiums. A large Roth conversion in 2024 increases 2026 Medicare premiums.

The 2024 IRMAA thresholds for individuals:

• Below $103,000: Standard premium ($174. 70/month in 2024)
• $103,000-$129,000: Standard + $69. 90
• $129,000-$161,000: Standard + $174. 70
• $161,000-$193,000: Standard + $279. 50
• $193,000-$500,000: Standard + $384. 30
• Above $500,000: Standard + $419.

A $50,000 conversion that pushes income from $100,000 to $150,000 triggers an extra $174. 70 monthly in Medicare premiums two years later. That’s $2,096 annually-reducing the conversion’s tax benefit significantly.

Married couples face the same cliff effects at different income levels. The calculation matters especially for those already near IRMAA thresholds.

State Tax Implications

Federal taxes grab headlines, but state taxes change the conversion math substantially. Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire (on wages), South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents of these states face simpler conversion decisions.

California taxes Roth conversions at rates up to 13. 3%. New York City residents can face combined state and local rates exceeding 12%. These states make conversions more expensive-and potentially less attractive.

Then there’s the retirement income exemption angle. Several states exempt pension and retirement income from taxation but tax Roth conversions fully. Illinois exempts retirement income entirely. A conversion in Illinois triggers state tax; a retirement withdrawal doesn’t. The federal math might favor conversion while the state math opposes it.

Conversion Strategies Beyond Simple Transfers

“Convert everything” rarely makes sense. Strategic partial conversions typically outperform all-or-nothing approaches.

Bracket-filling: Convert just enough to reach the top of your current bracket. Someone in the 12% bracket with room for $40,000 converts exactly $40,000. Next year, do it again. Over a decade, this approach can shift hundreds of thousands into Roth accounts without ever touching higher brackets.

Tax-loss harvesting coordination: Capital losses offset capital gains and up to $3,000 of ordinary income. Harvesting losses in December creates additional conversion capacity. A $10,000 loss allows $10,000 more in conversion before reaching the same tax bill.

Conversion of specific assets: Most brokerages allow converting specific investments rather than liquidating and transferring cash. Converting appreciated stocks moves gains into a tax-free wrapper. Converting depreciated assets first can be smarter-the lower cost basis means less immediate tax while preserving the loss position for the taxable account.

Charitable coordination: Qualified Charitable Distributions satisfy RMDs without increasing taxable income. Taking a QCD instead of a regular RMD creates more room for Roth conversions at lower brackets.

The Five-Year Rules Explained

Roth accounts have two separate five-year rules that confuse even experienced investors.

Rule one: Converted amounts face a five-year waiting period before tax-free withdrawal. Converting $50,000 in 2024 means those specific dollars can’t be withdrawn without penalty until 2029. This applies per conversion. A 2025 conversion has its own five-year clock.

Rule two: Earnings require the account to be open for five years AND the owner to be 59½. Meeting only one condition isn’t enough.

For investors over 59½, rule one matters less-early withdrawal penalties don’t apply anyway. For younger investors, converting too much can create liquidity problems if those funds might be needed within five years.

Modeling Different Scenarios

Smart conversion decisions require modeling multiple outcomes. Consider three scenarios:

Base case: Current income, current tax law, moderate investment returns. Does the conversion pay off in 10 years? 20 years?

Tax rate increase: The Tax Cuts and Jobs Act provisions expire after 2025. Brackets revert to 2017 levels with slight inflation adjustments. The 22% bracket becomes 25% - the 12% bracket becomes 15%. How does conversion math change under higher rates?

Required distributions: RMDs force traditional account withdrawals starting at age 73 (75 for those born after 1960). Large traditional balances create large RMDs-potentially pushing retirees into higher brackets involuntarily. Conversions now prevent that problem later.

Fidelity’s planning tools suggest most investors benefit from converting when current tax rates are 5+ percentage points below expected retirement rates. T. Rowe Price research indicates partial conversions spanning 10-15 years typically outperform single large conversions.

Year-End Action Items

Investors considering December conversions should complete these steps:

1. Calculate current-year income as precisely as possible. Check for all expected capital gains distributions.

2 - Determine bracket headroom. How much can be converted before reaching the next bracket?

3. Check IRMAA implications if over 63 or approaching Medicare eligibility.

4. Verify RMDs are complete before converting from traditional IRAs.

5. Submit conversion requests by December 15 to ensure completion.

6 - Confirm completion before year-end. Don’t assume-verify the transaction posted in 2024.

Roth conversions represent one of few remaining tax planning opportunities with substantial long-term impact. But they’re not universally beneficial. Someone expecting lower retirement income, living in a high-tax state, or near IRMAA thresholds might reasonably skip conversions entirely.

The year-end deadline creates urgency - urgency shouldn’t override analysis. Run the numbers. If the math works, act before December 15. If it doesn’t, wait for next year’s opportunity.