Roth Conversions

Client Profile

Names: Mike and Sarah
Ages: 45 and 43
Occupations: Mike is a dentist with an income of $250,000; Sarah is a marketing director earning $120,000
Annual Household Income: $370,000
Current Retirement Assets:

• Mike’s 401(k): $600,000 (Traditional)
• Sarah’s 401(k): $300,000 (Traditional)
• Joint taxable brokerage: $150,000
• Emergency savings: $50,000

Goal:

Retire at age 60-62 with an after-tax income of approximately $200,000 per year and maintain flexibility in future tax planning.

Current Situation and Concerns:

Mike and Sarah are in their peak earning years and saving aggressively for retirement. Their current tax bracket is 32% federal (plus state tax), and almost all their retirement savings are in pre-tax 401(k) accounts. They are concerned that when they retire and begin taking Required Minimum Distributions (RMDs), they will be forced into higher tax brackets- especially if future tax rates rise.

They have heard about Roth conversions and want to know:

• Whether they make sense while still in a high tax bracket.
• When the optimal time might be to start converting.
• How much to convert without creating unnecessary tax drag.

Analysis and Strategy:

1. Roth Conversion Basics

A Roth conversion involves transferring assets from a pre-tax IRA or 401(k) to a Roth IRA and paying taxes on the converted amount now, in exchange for tax-free growth and withdrawals later.

Key benefits:

• Tax-free income in retirement
• No RMDs on Roth IRAs
• Tax diversification (control over future taxable income)
• Potential estate benefits, since Roth assets pass to heirs income tax-free.

2. Why Converting Now (in Their 40s) May Not Be Ideal

Since Mike and Sarah are both working and earning high incomes, they’re in a top marginal bracket. Converting large amounts now would mean paying taxes at their highest rate. That would likely negate the long-term benefit.

Instead, the focus should be on strategic timing-identifying low-income years when conversions are more tax-efficient.

3. Ideal Timing: The “Gap Years” Strategy

Gap Years are the years after retirement but before taking Social Security and RMDs-typically between ages 60 and 73 (under current RMD rules).

In those years, Mike and Sarah will likely:

• Have little or no earned income.
• Be living on IRA withdrawals, taxable brokerage assets and cash.
• Be in a lower marginal tax bracket (possibly 12–22%).

This creates a window to convert traditional IRA dollars to Roth at lower tax rates-filling up the lower tax brackets intentionally each year.

Example:

• Convert up to the top of the 22% or 24% bracket each year.
• Gradually shift several hundred thousand dollars from pre-tax to Roth over a 10-12 year period.
• Reduce future RMDs and increase tax-free flexibility in retirement.

4. Mid-Career Roth Opportunities (Selective Conversions)

While full conversions now may not make sense, small strategic conversions could still be valuable:

• Convert small amounts (e.g., $10,000–$20,000 per year) up to the next tax bracket threshold.
• Use year-end tax projections to identify unused portions of a tax bracket.
• Fund conversions during low-income years (e.g., if Sarah takes a sabbatical or Mike reduces hours).

5. Additional Strategies to Enhance the Roth Plan

Mega Backdoor Roth 401(k):
If their employer plans allow after-tax contributions to 401(k)s, they could make large after-tax contributions and roll them into Roth IRAs -accelerating Roth accumulation while still working.

Backdoor Roth IRAs:
Because their income exceeds the Roth contribution limit, they can use the backdoor method, making a nondeductible IRA contribution and then converting it to a Roth IRA each year.  This works well only if the clients have no assets in an IRA currently.

Roth 401(k) Contributions Going Forward:
They may direct new contributions into Roth 401(k) accounts rather than pre-tax, particularly if they expect higher taxes later or plan early retirement.

Tax Diversification:
By building a mix of pre-tax, Roth, and taxable accounts, they’ll have maximum flexibility to manage taxable income in retirement.

6. Projected Outcome

If they begin Roth conversions after retirement (ages 60–73):

• Convert an amount annually not to exceed the 22–24% brackets.
• Reduce RMDs significantly after age 73.
• Create a large Roth bucket ($1M–$1.5M projected by age 73, assuming 6% growth).
• Lower lifetime taxes, reduce exposure to future tax rate hikes, and enhance legacy planning.

7. Key Takeaways

• Don’t convert in your highest earning years unless you have a short-term income dip.
• Use retirement gap years for substantial Roth conversions at lower brackets.
• Implement backdoor and mega backdoor strategies during working years to build Roth exposure gradually.
• Review annually to optimize conversion amounts based on tax brackets, deductions, and investment performance.

Conclusion

For Mike and Sarah, the Roth conversion strategy isn’t an all-or-nothing decision. It’s a long-term tax management plan designed to smooth out taxes over time, reduce future RMDs, and ensure greater flexibility in retirement income planning.
By waiting until retirement and using the gap years wisely, they can substantially increase their tax-free wealth — potentially saving hundreds of thousands of dollars in lifetime taxes.

Disclosures: 

This case study is provided for illustrative purposes only to provide an example of the firm’s process and methodology. The results portrayed in this case study are not representative of all client situations or experiences. An individual’s experience may vary based on his or her individual circumstances and there can be no assurance that the firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the firm’s investment advisory services. The information contained herein should not be construed as personalized investment advice.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of The Pitti Group strategies are disclosed in the publicly available Form ADV Part 2A.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

This information is general in nature and should not be considered tax advice.  Investors should consult with a qualified tax consultant as to their particular situation.

The Pitti Group Wealth Management, LLC (“The Pitti Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Pitti Group and its representatives are properly licensed or exempt from licensure.