The Roth Conversion Nobody Scheduled

Why a low-income year is a conversion year — and why the window closes December 31

A Tax Alpha Companies playbook for CPAs

The year the client stops looking

Most clients think about Roth conversions never, and the ones who do think about them in April, when it is too late to do anything about the year that just closed. The conversion that matters is the one you see coming in the fall of a year the client's income has quietly fallen off. It is invisible unless someone is watching for it.

The setup is ordinary. A client who normally earns $400,000 has a gap year between jobs. A business owner has a loss year. A retiree is in the window between leaving work and the year RMDs and Social Security switch on. In each case the client's taxable income has dropped into a lower bracket, leaving room at the bottom of the rate schedule that will never come back. Converting traditional IRA or 401(k) dollars to Roth in that window means paying tax now, at a rate the client may never see again, and moving all future growth into a bucket that is never taxed again.

The client will not raise this. The income dip feels like a problem to endure, not an opportunity to use. That makes it a planning conversation, not a filing one, and it has a hard deadline.

The mechanics are bracket arithmetic

A conversion is taxed as ordinary income in the year it is completed. The strategy is to convert exactly enough to "fill" the current bracket, using up the low-rate room without spilling into the next bracket, where the marginal cost rises.

The arithmetic is direct:

1. Project the client's ordinary taxable income for the year without any conversion.
2. Identify the top of the target bracket, the bracket the client is willing to pay tax in on the conversion.
3. Convert the difference.

Take a married client who normally lands in the 35% bracket at $400,000 of income but has only $90,000 this year. The 24% bracket for joint filers runs to roughly $400,000 of taxable income in 2026 (verify the current-year figure), but the planning target is usually tighter, often the top of the 22% or 24% band. If the client is comfortable paying 24%, there may be room to convert a very large number. If the goal is to stay inside 22%, the room is smaller but the rate is better. The point is that the conversion is sized to a bracket, not pulled out of the air.

The reason to care about the bracket ceiling is that a conversion is a voluntary acceleration of tax. It only makes sense if the rate paid now is lower than the rate the client would otherwise pay on those dollars later, in retirement, under RMDs, or after a surviving spouse drops into single brackets. Filling a 22% or 24% bracket today to avoid 32% or 35% later is the trade. Overshooting into a higher bracket than the client would have faced later defeats the purpose.

The deadline is the whole point

This is where the strategy differs from almost every other retirement move, and where it gets lost.

A traditional or Roth IRA contribution can be made up to the tax filing deadline, April 15 of the following year. A Roth conversion cannot. A conversion must be completed by December 31 to count in that tax year. There is no grace period, no extension, no "we'll do it with the return."

"Completed" means the funds have actually moved from the traditional account to the Roth account on the custodian's books by year-end. And custodians slow down in late December, with holidays, year-end processing volume, and cutoff dates for conversion requests all compressing the real deadline well before the 31st. A client who decides on December 29 may find the custodian cannot process it in time, and the entire low-income year is wasted.

This is why the conversion is a November decision dressed up as a December one. The modeling, the client's decision, and the custodian's processing all have to happen with room to spare.

Two things that changed the math

Recharacterization is gone. Before 2018, a client could convert and then "recharacterize," undoing the conversion up to the extended filing deadline if the market dropped or income came in higher than expected. The Tax Cuts and Jobs Act eliminated recharacterization of conversions. Once a conversion is done, it is done. There is no do-over.

The practical consequence is that the modeling has to be right before the trigger is pulled. If a client converts $160,000 expecting to stay in the 24% bracket and then books an unexpected $100,000 of income in December, the top slice of that conversion is now taxed at a higher rate with no way to reverse it. The disappearance of the safety net raises the premium on accurate year-end income projection, which is another argument for acting while there is still time to project the year accurately but not so early that late income is unknown.

The downstream effects are real. A conversion increases the client's adjusted gross income, and AGI drives several things beyond the income tax:

• IRMAA. Medicare Part B and Part D premiums are surcharged based on MAGI from two years prior. A large conversion this year can raise the client's Medicare premiums in the year two years out. For a client near a Medicare age, model this explicitly.
• ACA premium subsidies. For a client buying coverage on the exchange, a conversion that raises MAGI can reduce or eliminate the premium tax credit.
• Social Security taxation. Higher AGI can push more of the client's Social Security benefits into the taxable range.
• NIIT and capital-gain rates. A conversion raises MAGI, which can expose investment income to the 3.8% surtax or push long-term gains from the 15% to the 20% rate.

None of these kills the strategy. They mean the conversion should be sized against the client's full picture, not just the income-tax bracket in isolation.

Where the tax is paid from decides whether it works

The single most important execution detail: the client should pay the conversion tax from outside the retirement account, using taxable (non-retirement) funds.

If the client instead withholds the tax from the converted amount, converting $160,000 but sending $35,000 of it to the IRS as withholding, two bad things happen. First, only $125,000 actually lands in the Roth, so the client has moved less into the tax-free bucket. Second, if the client is under 59½, that $35,000 that did not reach the Roth is treated as a distribution, potentially subject to income tax and a 10% early-withdrawal penalty.

The ideal candidate therefore has three things: a genuine dip in income, taxable cash on hand to pay the resulting tax, and a long runway for the Roth to grow tax-free. A client with the low-income year but no outside cash to pay the tax usually has a smaller real opportunity than the bracket math suggests, or none worth taking this year.

Who this fits — and who it does not

A strong candidate:

• A clear, temporary dip in income (gap year, loss year, early-retirement window before RMDs and Social Security)
• Substantial traditional IRA / 401(k) balances that will otherwise be taxed at higher rates later
• Taxable funds available to pay the conversion tax
• A long time horizon before the Roth is needed
• Expectation of higher rates later, personally (RMDs, survivor brackets) or legislatively

A poor candidate:

• No low-bracket room, already in a high bracket this year
• No outside cash to pay the tax
• Short time horizon, or likely to need the funds soon
• Near a Medicare or ACA cliff the conversion would push them over without offsetting benefit
• Expectation of a lower rate later, making acceleration counterproductive

The practitioner's checklist

1. Scan the client base in Q4 for anyone with an unusual income drop this year. That is the trigger.
2. Project full-year ordinary income before any conversion.
3. Set the target bracket ceiling and size the conversion to fill it, not overshoot it.
4. Confirm the client has outside taxable funds to pay the tax. If not, reconsider the size.
5. Model the downstream effects: IRMAA (two years out), ACA subsidies, Social Security taxation, NIIT, capital-gain rate thresholds.
6. Remember there is no recharacterization. The projection has to hold.
7. Start the conversion well before December 31 to clear custodian processing. Treat late December as already too late.
8. Document the rate-arbitrage rationale, paying a known lower rate now versus a projected higher rate later.

Talk it through

The Roth conversion is the rare move that is both simple and routinely missed, because the opportunity hides inside what looks like a bad year. If a client is having an unusual income year, it is worth sizing the conversion before the custodian's year-end cutoff makes the decision for you.

Ross Brannon · Tax Alpha Companies
C: 850-566-7999 · ross@taxalphacompanies.com
Schedule time with Ross

Contribution, benefit, and bracket figures referenced are 2026 amounts and are indexed annually; verify current-year amounts against applicable IRS guidance before relying on them.

This material is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.