Roth Conversion Strategy for Pre-Retirees: When, How Much, and Why Timing Is Everything

There is a stretch of years in most retirements that tax planners quietly consider the most valuable real estate in a financial plan. It usually starts the year you stop working and ends the year required minimum distributions begin. Your paycheck is gone, Social Security may not have started, and your taxable income can drop to the lowest level it will ever be. For a season, you get to choose what your income is. Most people let those years pass without doing anything with them, and the opportunity closes on its own.

A Roth conversion is one of the primary ways to use that window. This guide explains what a conversion is, when it tends to make sense, how the five-year rule actually works, and how conversions fit into a broader retirement income plan, including the California state tax question that matters so much for our clients in the Sierra foothills and the Bay Area.

1. What a Roth Conversion Is, and Why Anyone Volunteers to Pay Tax Early

A Roth conversion is the transfer of money from a traditional IRA, or a pre-tax employer plan balance, into a Roth IRA. The converted amount is added to your taxable income for the year, taxed at ordinary federal and state rates, and then it lives in the Roth permanently. From that point forward, qualified withdrawals of both the converted dollars and their future growth are federal income tax free.

On the surface, paying tax years before you have to sounds backwards. The logic becomes clear when you stop thinking of your traditional IRA balance as entirely yours. A portion of every pre-tax dollar belongs to the Internal Revenue Service (IRS) and to the Franchise Tax Board, and the size of their share is determined by your tax rate in the year the money comes out. A conversion is simply choosing to settle that bill in a year when the rate is favorable rather than letting the timing be dictated by required withdrawals later.

Three structural features make Roth accounts especially useful in a retirement income plan:

• No lifetime required minimum distributions for the owner. Traditional IRAs force taxable withdrawals on the IRS schedule. Roth IRAs do not require withdrawals during the original owner's lifetime, which gives you control over the timing and size of your taxable income for the rest of your life. If the term is new to you, our glossary entry on required minimum distributions covers the mechanics.
• Tax diversification. Holding pre-tax, Roth, and taxable brokerage assets gives you three different tax treatments to draw from each year, which is the raw material of retirement tax planning.
• Estate flexibility. Heirs who inherit a Roth IRA generally must empty the account within ten years, but those withdrawals are typically income tax free, unlike inherited traditional IRA withdrawals that land on top of the heir's own earnings, often during their peak career years.

2. When to Convert: The Three Timing Signals

Conversion timing comes down to one question. Is your tax rate today likely lower than the rate that will apply to this money later? Three situations tend to answer yes.

Low income years. The classic window is the period between your last paycheck and the start of Social Security and required minimum distributions. Under current law, required minimum distributions begin at age 73 for people born from 1951 through 1959, and at age 75 for people born in 1960 or later, per the SECURE 2.0 Act. Someone who retires at 60 with the later start age can have up to fifteen years of artificially low income. Sabbaticals, a year between a liquidity event and the next venture, or a year of large deductible expenses can create smaller versions of the same window.

Market downturns. Converting when account values are temporarily depressed means you pay tax on a smaller number, and any subsequent recovery happens inside the Roth where it is never taxed again. Markets cannot be predicted, so this is opportunistic rather than something to wait for, but a meaningful drawdown is a reasonable prompt to revisit a conversion plan already in motion.

Ahead of known income increases. If you can see higher taxable income coming, whether from required minimum distributions on a large balance, deferred compensation payouts, or the survivor's shift from married filing jointly to single rates after a spouse's death, converting before the increase can settle the tax at today's lower rate. The single filer issue is one of the most overlooked. The surviving spouse inherits the same accounts but roughly half the bracket width, which means the same withdrawals get taxed noticeably harder.

One caution that applies across all three signals. Conversion income raises your modified adjusted gross income (MAGI), which can affect Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA). Medicare looks back at your tax return from two years prior, so a conversion at 63 or later can raise premiums at 65. This does not usually kill a conversion strategy, but it belongs in the math.

Two execution mechanics worth knowing before year end. A conversion counts for the tax year in which it is completed, so a 2026 conversion must be done by December 31, 2026, not by the April filing deadline, per IRS Publication 590-B. And most conversions are best executed as a direct trustee-to-trustee transfer between custodians, which avoids the withholding and 60-day rollover complications an indirect rollover can create.

3. The Five-Year Rule, Explained Without the Confusion

The five-year rule causes more anxiety than almost any other Roth topic, largely because there are actually two separate five-year rules and most articles blur them together.

Rule one governs earnings. For the growth inside your Roth IRA to come out completely tax free, five tax years must have passed since January 1 of the year of your first ever Roth IRA contribution or conversion, and you must be at least 59 and a half, per IRS Publication 590-B. This clock starts once, applies to all your Roth IRAs collectively, and never restarts. If you opened any Roth IRA in 2021 or earlier, this rule is already satisfied for you today.

Rule two governs converted principal. Each conversion starts its own separate five-year clock. If you withdraw converted dollars before that conversion's clock runs and before age 59 and a half, a 10 percent penalty applies to the withdrawal. The purpose is to stop people from using conversions as a back door around the early withdrawal penalty. Once you reach 59 and a half, this second rule effectively stops mattering, because the penalty it enforces no longer applies to you.

And one bucket the rules barely touch: contributions. Direct Roth IRA contributions are made with after-tax dollars and can generally be withdrawn at any time, at any age, without tax or penalty. The IRS enforces this through a specific ordering rule for Roth IRA distributions: regular contributions come out first, then converted amounts starting with the oldest conversion, and earnings come out last. Because contributions and converted principal exit before earnings, many withdrawals in a Roth IRA's early years never touch earnings at all, which is part of why the two five-year clocks get analyzed separately. Just do not confuse the flexibility of contributions with the treatment of conversions and earnings, where the clocks apply.

The practical translation for most pre-retirees over 59 and a half: open and fund a Roth IRA now if you have never had one, so the earnings clock is running, and then conversion timing can be driven entirely by tax bracket strategy rather than penalty avoidance.

4. Conversion Sequencing: Filling the Bracket, Year After Year

For a large pre-tax balance, the question is rarely whether to convert. It is how much per year. Converting a $1.5 million IRA in a single year would stack most of it into the top federal brackets and defeat the purpose. The standard approach is bracket filling. Each year, you estimate your taxable income from all other sources, then convert just enough to bring total taxable income up to the top of a target bracket, and stop.

The 2026 federal brackets make the terrain concrete. Per IRS Revenue Procedure 2025-32:

The 2026 standard deduction is $32,200 for joint filers and $16,100 for single filers, and taxpayers 65 and older may qualify for additional deduction amounts, all per the same IRS guidance. Conversion income has no special rate of its own. It stacks on top of your other ordinary income and fills these brackets from the bottom up.

Notice the shape of that table. There is a wide, relatively flat plateau through the 22 and 24 percent brackets, then a cliff to 32 percent. For many of our clients, the strategy is to fill up to the top of the 22 or 24 percent bracket every year of the conversion window and never cross the cliff.

A hypothetical illustration, not based on any actual client. Sam and Jordan are married, both retired, not yet collecting Social Security, and hold $1.5 million combined in traditional IRAs. After their other income and the $32,200 standard deduction, their taxable income before any conversion is $150,000, which sits inside the 24 percent bracket. The top of that bracket is $403,550, so they have roughly $253,550 of room ($403,550 minus $150,000) to convert this year without a single dollar taxed above 24 percent federally. Repeating that exercise annually with updated numbers, they could reposition a large share of the $1.5 million over several years without ever paying top rates on it, rather than letting future required minimum distributions force the money out at whatever bracket those years happen to bring.

Sequencing also has to respect the thresholds hiding between the brackets. IRMAA tiers, the 3.8 percent Net Investment Income Tax (NIIT) threshold on investment income, and the phase-out of the new senior deduction under 2025 tax legislation all sit at specific MAGI levels. A well built conversion plan maps every relevant threshold for your situation, not just the bracket lines.

5. How Conversions Fit the Larger Retirement Income Picture

A Roth conversion plan is not a standalone tactic. It is one gear in the retirement income machine, and it has to mesh with three others.

Social Security timing. Delaying benefits to age 70 increases the monthly benefit and, conveniently, keeps taxable income low during exactly the years that are best for converting. Converting hard from retirement until benefits begin, then tapering, is one of the most common patterns we model. Conversion income can also affect how much of your Social Security benefit becomes taxable once benefits start, which is another reason to front load conversions before claiming.

Required minimum distributions. Every dollar converted before age 73 or 75 is a dollar removed from the balance those mandatory withdrawals are calculated on. For large IRAs, a decade of disciplined conversions can meaningfully shrink future required distributions, which in turn keeps later-life taxable income, Medicare premiums, and survivor tax exposure lower. One rule to respect: in any year you are already subject to a required minimum distribution, that distribution must come out first and cannot itself be converted.

Taxable accounts. Ideally, the tax bill on a conversion is paid from a taxable brokerage account rather than withheld from the conversion itself. Paying from outside funds means 100 percent of the converted amount lands in the Roth, and it quietly shrinks a taxable account that was generating its own annual tax drag. For clients with concentrated stock positions, conversion years and diversification years also need to be choreographed together, since capital gains and conversion income compete for the same bracket space. This coordination is the core of the work on our tax planning services page.

6. The California Question

California conforms to federal treatment of Roth conversions, which means the converted amount is also taxed as ordinary income on your state return in the year of conversion. California's ordinary rates run up to 12.3 percent, plus an additional 1 percent mental health services surtax on taxable income above $1 million. There is no preferential state rate and no partial exclusion. A large conversion for a high income California household can carry a combined federal and state marginal cost north of 40 percent, which is exactly the outcome bracket filling is designed to avoid.

The state question cuts the other way too, and for anyone with a move on the horizon it becomes a genuine two-scenario comparison. Scenario one: convert while a California resident and pay up to 13.3 percent of state tax on top of federal. Scenario two: establish residency in a lower tax or no income tax state first, then convert and pay little or no state tax on the same income. On paper scenario two wins easily, but residency is fact-specific, California examines it closely, and the years spent waiting may be exactly the low income window that makes converting attractive in the first place. The right answer is to model both paths with real dates rather than assume. If you are moving into California, or committed to staying, converting during low income years at modest state brackets can still be very attractive. And two facts soften California's bite for those who stay: the state does not tax Social Security benefits, and qualified Roth withdrawals are free of California tax just as they are free of federal tax.

This is a recurring conversation with the households we serve, including Bay Area transplants settling into Placer County, pre-retirees with concentrated stock, and tech professionals after a liquidity event, all of whom tend to have large pre-tax balances and unusual income patterns that make the conversion math both more valuable and more delicate.

7. When to Bring in a Fee-Only Fiduciary

You do not need an advisor to open a Roth IRA. You may want one before you commit to a multi-year conversion plan, because the decision touches nearly everything at once: federal brackets, California rates, Medicare premiums, Social Security taxation, required minimum distribution projections, charitable plans, estate intentions, and the sequence in which you will spend your accounts. Getting one input wrong rarely ruins the plan. Getting the interactions wrong can quietly cost six figures over a retirement.

As a fee-only fiduciary firm, Up Capital Management is paid only by clients, never by commissions or product sales, and we are legally obligated to act in your best interest. A conversion analysis with us produces a year-by-year map: how much to convert, in which years, from which accounts, with the tax paid from where, and which thresholds to watch. It is coordinated with your Certified Public Accountant (CPA) or tax preparer, because a conversion plan that your tax professional has not blessed is not finished.

If the window years described at the top of this article are on your horizon, the best time to model a conversion strategy is before they start, not during them.

Schedule a conversation about your conversion window →

Sources

• IRS Revenue Procedure 2025-32, 2026 inflation adjusted tax brackets and standard deduction
• IRS, Retirement Plan and IRA Required Minimum Distributions FAQs
• IRS Publication 590-B, Distributions from Individual Retirement Arrangements
• SECURE 2.0 Act of 2022, required minimum distribution age provisions
• California Franchise Tax Board, personal income tax rate schedules

Disclosures. Up Capital Management is a registered investment advisor. Registration does not imply a certain level of skill or training. This article is educational in nature and reflects rules and figures believed accurate as of the publication date, which are subject to legislative and regulatory change. Nothing here constitutes individualized tax, legal, or investment advice. Roth conversion strategies depend heavily on individual circumstances, including income, residency, account balances, and estate objectives, and any conversion decision should be reviewed with a qualified tax professional before implementation. No specific tax outcome or savings amount is guaranteed. Examples presented, including the Sam and Jordan illustration, are hypothetical only, are not based on any actual client, and do not reflect the experience of any Up Capital Management client. Past performance does not guarantee future results.

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