Kassidy Wagner

Most tax planning is about finding ways to pay less tax this year. 

A Roth conversion is different. You voluntarily create taxable income today to put yourself in a better tax position later. 

The key is not simply deciding whether to convert. It is deciding when to do it and how much. 

What Are You Actually Converting? 

A Roth conversion moves money from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA. 

You generally pay ordinary income tax on the previously untaxed amount converted. From there, the money can continue growing in the Roth, where qualified withdrawals are tax-free. Roth IRAs also do not require the original owner to take required minimum distributions during their lifetime. 

No general income limit prevents a taxpayer from converting a traditional IRA to a Roth IRA. 

That makes the decision less about whether you can convert and more about whether the tax cost makes sense. 

Look for the Right Year 

Suppose you normally have $150,000 of taxable income but expect this year to come in at $80,000. 

Maybe the farm had a poor year. Maybe you retired but have not started Social Security yet. Maybe the business had an unusually slow year or depreciation brought taxable income down. 

That lower-income year may give you room to convert part of a traditional IRA at a tax rate you are comfortable paying. 

And you don't have to convert the entire account. 

If you have a $300,000 traditional IRA but only want to add $30,000 of taxable income this year, you can convert $30,000 and reevaluate the rest in future years. 

For many taxpayers, a series of partial conversions can make more sense than one large conversion. 

Why Start Planning in January? 

January gives you a full year to work with. 

You can estimate income from the farm, business, wages, pensions, investments, and other sources and identify whether the year may present a conversion opportunity. 

That doesn't mean the entire conversion needs to happen in January. 

Income changes. Crops get sold. Cattle prices move. Businesses have better or worse years than expected. Capital gains show up. Equipment gets purchased. 

Starting early gives you a target. Revisiting the projection later in the year helps determine the final number. 

For someone with variable income, that flexibility matters. 

The Tax Bill Is Real 

If you convert $50,000 of fully taxable traditional IRA money, you generally add $50,000 of ordinary income to that year's tax return. 

That additional income can affect more than your federal income tax bracket, so the entire return needs to be considered before deciding on an amount. 

Ideally, you also have cash outside the retirement account available to cover the resulting tax. Using retirement funds to pay the tax leaves less money invested in the Roth and can create additional issues depending on your circumstances. 

The tradeoff is that you are paying tax on that money now in exchange for Roth tax treatment in the future. 

What Are You Getting in Return? 

Once the money is converted to the Roth, qualified distributions, including earnings, can be tax-free. Roth IRA owners also aren't required to take distributions during their lifetime. 

That can be valuable for someone who expects significant retirement income from pensions, Social Security, rental property, investments, or large pre-tax retirement accounts. 

Think of a Roth conversion as moving a future tax bill into a year you deliberately choose. 

The strategy becomes more attractive when today's tax rate is favorable compared with the rate you expect to face when the money would otherwise come out. 

Low-Income Years Can Create Opportunities 

A poor farm year or a slowdown in business isn't something anyone hopes for, but it may create a tax-planning opportunity. 

The same can happen during retirement. Someone may stop working before beginning Social Security or before required distributions begin. Those years can leave taxable income substantially lower than it was during their working years. 

Instead of allowing those lower tax brackets to go unused, it may make sense to recognize some retirement income intentionally through a conversion. 

One Important Warning: You Can't Undo It 

This is one reason projections matter. 

Under current law, you can't later recharacterize a completed Roth conversion back into a traditional IRA. 

If you make a large conversion expecting a low-income year and income later comes in much higher than anticipated, you cannot simply reverse the conversion because you don't like the resulting tax bill. 

That is particularly important for farmers and business owners whose income can change significantly during the year. 

Should You Convert? 

A Roth conversion isn't automatically a tax-saving strategy. 

If you're already in a high-income year, expect your tax rate to fall substantially in retirement, need the money soon, or don't have outside cash available for the tax, the numbers may not work in your favor. 

But if you're approaching retirement, sitting on substantial pre-tax retirement savings, or expecting an unusually low-income year, it's worth looking at. 

The goal isn't simply to pay tax now or later. It's to determine which years make the most sense to recognize the income. 

That's why Roth conversion planning can start in January. Estimate the year, watch how the numbers develop, and adjust the strategy before year-end. 

If you think you may have a lower-income year or want to know whether a Roth conversion fits into your retirement and tax plan, we are happy to run the numbers with you.