2026 Tax Strategies with Roth Conversions

Roth IRAs were established in 1997 and named after former Delaware Sen. William Roth. These accounts were designed to be funded with after-tax dollars, unlike traditional IRA contributions which are funded with pre-tax money and often qualify for a tax deduction.

Roth IRA balances are not subject to taxation and all future withdrawals are generally tax-free. Withdrawals from a traditional IRA count as taxable income.

Roth IRA holders do not have to take a required minimum distribution (RMD) from their account each year. By contrast, the account holder of a traditional IRA must take a yearly RMD starting at age 73 (age 75 if born in 1960 or later).

Because of these key distinctions, Roth conversion strategies can be advantageous for people with large traditional IRA balances who expect to pay as much or more income tax in retirement as they are paying now.

One of the best times to convert IRA funds to a Roth IRA is during the “trough years.” This is the period after you retire but before RMD rules apply.

Advantages of a Roth IRA conversion

When making a Roth conversion, the tax is paid on retirement savings today, in exchange for tax-free growth for the future. As shown below, conversions during “trough years” can keep a person in a lower tax bracket. This can help avoid a larger tax bill. It can also help keep future RMDs from facing higher tax rates.

As a result of converting $60,000 — equivalent to 6% annual growth in the traditional IRA balance — to a Roth IRA each year from ages 62 to 72, the retiree in this hypothetical example would have a balance of more than $2 million at age 85.

This is possible because the person can let their Roth IRA grow tax-free while relying on RMDs from their traditional IRA as income. If left untouched, the Roth IRA balance in this example could potentially reach nearly $5 million by the time the retiree was 100.

Roth conversion benefits for inherited accounts

For non-spouse beneficiaries who inherit an IRA after the owner dies, the SECURE Act applies. As of Jan. 1, 2020, the Act requires the inherited IRA balance to be distributed by the end of the 10th year. The 10-year period starts the year following the original owner’s death. Some exceptions to inherited IRA rules may apply.

Roth conversion tax planning helps ensure that the inherited retirement account balance is tax-free — relieving beneficiaries of the taxable income impact from the 10-year withdrawal requirement.

Does a Roth conversion make sense in 2026?

It does, in specific situations. Let’s say you have a traditional IRA that you’ve been paying into for years. Once you retire, you and your spouse start drawing Social Security within one year. You also have income from savings and investment account withdrawals.

This mix may push you into a higher tax bracket. Then, any IRA withdrawals may be taxed at a higher rate. Converting a traditional IRA to a Roth IRA can help reduce your overall tax burden.

Practical Example for 2026

Let’s look at an example of a married couple with a base income of $110,000.

When they start RMDs at age 73, they may add $60,000 to their other income. Instead of waiting to start RMDs, they can move that $60,000 to a Roth IRA during their “trough years.” Their taxable income is still going to be $170,000 (which falls within the 22% bracket), but that money can continue to grow tax-free. It will also be unaffected by future required distributions.

By strategically managing conversions to stay within the 22% or 24% bracket, they can avoid being pushed into the 32% bracket or higher in future years, when RMDs become mandatory.

Key Considerations When Planning Conversions

When planning Roth conversions for 2026, consider:

1. Current vs. future tax rates: If you expect to be in a higher tax bracket in retirement, converting now at a lower rate makes sense. Also, consider the “widow’s penalty” if your spouse is much younger and/or healthier and will file taxes as a single filer after you pass away.
2. Income timing: The period between retirement and age 73 (when RMDs begin) often presents the best opportunity for conversions.
3. Medicare premiums: Higher income from conversions may affect Medicare Part B and Part D premiums (IRMAA), so plan conversion amounts carefully. However, higher income from RMDs in later life could cause permanently higher premiums. Consider taking an IRMAA hit in a few years rather than paying it from age 73 until death.
4. State taxes: Consider your state’s tax treatment of Roth conversions, especially if you’re planning to relocate in retirement.
5. Long-term growth potential: The longer your money has to grow tax-free in a Roth IRA, the more advantageous the conversion becomes.

Taking action

If you’re considering a Roth IRA conversion, it’s important to weigh the current factors that apply to your specific situation as well as how things may change during your retirement. Strategic conversion planning requires careful analysis of:

• Your current and projected future tax brackets
• The IRA conversion timing and amount — to optimize tax efficiency
• Coordination with Social Security claiming strategies
• Impact on Medicare premiums and other income-tested benefits
• Estate planning objectives for your beneficiaries

For personalized retirement tax planning advice tailored to your situation, contact your wealth advisor. If you’re not already a Mercer Advisors client, let’s talk.