Roth Conversion Strategy for $1.5 Million in Pretax 401(k)s

A couple in their late 50s with $1.5 million in pretax retirement accounts faces a critical window for Roth conversions before required minimum distributions and IRMAA surcharges take effect.

A married couple in their late 50s with $1.5 million in traditional 401(k)s and $400,000 in taxable brokerage holdings is weighing Roth conversions within the 22 percent federal tax bracket to reduce future required minimum distributions and Medicare premium surcharges.

Roth conversions count as ordinary taxable income in the year they occur and factor into modified adjusted gross income, which determines both ACA subsidy eligibility and IRMAA surcharges on Medicare premiums, according to the Internal Revenue Service. Withdrawals from traditional 401(k)s count as taxable income, while qualified withdrawals from Roth accounts do not count toward MAGI. Capital gains, dividends, and interest from taxable brokerage accounts are also included in MAGI calculations.

At least 70 percent of the couple's financial assets sit in tax-deferred accounts, with $125,000 each in Roth IRAs. Both spouses max out 401(k) contributions including catch-up provisions, and total household debt stands below $100,000 at a 3 percent interest rate. The couple also maintains a taxable brokerage account and contributes the annual maximum to Roth IRAs each year.

The optimal conversion window typically opens after retirement but before claiming Social Security and before RMDs begin, when taxable income is at its lowest. Paying conversion taxes from cash or taxable assets rather than withholding from the converted amount preserves the full value of the Roth account. Withholding before age 59½ can also trigger a 10 percent early-distribution tax on the amount withheld.

The IRMAA Threshold Problem

IRMAA, or the income-related monthly adjustment amount, is a surcharge added to Medicare Part B and Part D premiums for beneficiaries whose MAGI exceeds certain thresholds. The couple's concern is well-founded: Roth conversions push MAGI higher in the conversion year, potentially triggering higher Medicare premiums two years later when IRMAA is assessed based on prior-year tax returns.

The strategy of converting just enough to fill the 22 percent bracket is not automatically optimal, however. The more relevant question is whether paying tax on a conversion today costs less than leaving money in a traditional account and paying taxes — and potentially higher Medicare premiums — later. This requires modeling projected retirement income, future RMDs, expected Social Security benefits, and the size and timing of conversions.

For a couple planning to work until age 65 or 67, the years between retirement and the start of RMDs at age 73 represent the most favorable conversion period. During this window, earned income drops to zero while Social Security benefits may not yet be claimed, creating a lower tax bracket that makes conversions more cost-effective.

The couple's situation is complicated by the fact that one spouse has already switched employer contributions to a Roth 401(k), while the other spouse's employer only offers a traditional pretax 401(k). This asymmetry means the household will continue accumulating tax-deferred assets in one account even as the other shifts toward Roth treatment.

Funding Conversion Taxes Efficiently

Using excess cash or taxable brokerage holdings to pay conversion taxes is generally more tax-efficient than withholding from the converted amount itself. For example, converting $100,000 at a 22 percent rate means $22,000 in federal tax. Moving the full $100,000 into the Roth while paying the $22,000 from external funds maximizes the tax-advantaged growth potential of the converted assets.

The couple should also ensure paycheck withholding or estimated tax payments cover the additional tax liability to avoid an IRS underpayment penalty. Maintaining roughly six months of living expenses in cash for emergencies remains a priority, and conversion taxes should not drain that reserve.

Given the complexity of coordinating tax brackets, IRMAA thresholds, RMD timing, and Social Security claiming strategies, professional guidance from a certified financial planner who specializes in tax planning can help model different conversion scenarios. The couple's prior negative experience with an adviser during the 2008-09 financial crisis should not prevent them from seeking qualified help for this specific planning need.

Federal tax brackets, IRMAA thresholds, and RMD rules are subject to change. Readers should verify current figures against the latest IRS announcements and Medicare guidelines before making conversion decisions.

This article is for informational purposes only and does not constitute investment advice.