Roth Conversions: When You’ll Never Be in a Lower Bracket

This has become one of the most frequently discussed planning topics with our clients this year. While many articles focus solely on future tax brackets, our planning process looks at the broader picture including estate planning, state income taxes, charitable intentions, and the long-term tax consequences for future generations.

The standard Roth pitch: you’re at 24% now, you’ll be at 32% later, so pay the tax early. Sound reasoning, and irrelevant if you’re at 37% and will be at 37% at 75, at 85, and on the day your children inherit. There’s no bracket to arbitrage. Yet conversions are still among the most valuable moves available at this wealth level. Let’s look at the three reasons most advisors skip.

One note first: OBBBA made the TCJA rates permanent, so the 37% top rate never reverted to 39.6%. The “convert before rates rise” deadline is gone. And conversions have been irreversible since 2018; there’s no undo. So: model carefully, don’t hurry.

1. THE TAX YOU PAY LEAVES YOUR ESTATE
When you convert and pay the tax from a taxable account, the Roth is funded with the full pre-tax amount and the dollars used to pay the tax leave your balance sheet for good. For an estate above the exemption, those dollars would have been taxed at 40%. A conversion taxed at 37% has an effective cost closer to 22% for a family above the exemption. The arbitrage is real; it just comes from the estate tax, not the income tax.

One honest caveat: heirs of a traditional IRA get an income tax deduction under Section 691(c) for the estate tax attributable to the account, which softens the comparison. The advantage is real but narrower than the raw “40% plus 37%” framing suggests.

2. YOU LIVE IN FLORIDA & YOUR CHILDREN MAY NOT
A conversion is taxed to you, at your rates, in your state. An inherited traditional IRA is taxed to your children, at their rates, in theirs. You convert at 37% with no Florida tax. A New York heir pays roughly 48%. A California heir pays roughly 50%.

On a $5M account, converting rather than leaving it pre-tax to a California child is worth around $670,000, an arbitrage that exists purely because of where you established domicile, and that disappears the day you die with the account still pre-tax. Worth asking directly: where do your children actually live, and where will they live in twenty years?

3. WHAT THE TEN-YEAR RULE DOES TO HEIRS
Non-spouse beneficiaries must empty an inherited account within ten years, with annual distributions required in years one through nine if you die after your required beginning date. For a traditional IRA, that’s a decade of ordinary income landing during your children’s peak earning years.

An inherited Roth is a different animal: no annual distributions required, distributions tax-free, and your holding period carries over. Heirs can leave it untouched for the full ten years and take everything, including a decade of compounding, tax-free. It’s arguably the best asset to leave a child. A traditional IRA is among the worst.

WHEN NOT TO CONVERT
Never convert dollars destined for charity. A charity pays no income tax on a traditional IRA it receives, so converting first means paying 37% for nothing. Name the charity as the beneficiary of the pre-tax account and leave the Roth and taxable assets to your children. If you’re 70½ or older, qualified charitable distributions of up to $111,000 per person in 2026 do the same thing during your lifetime.

Also, hold off if you can’t pay the tax from outside funds, if a genuinely low-income year is coming that you could convert into instead, or if heirs are in lower brackets than you.

And two places conventional advice gets it backwards here: Medicare surcharges and the net investment income tax are usually not arguments against converting. If you’re already in the top IRMAA tier and already above the NIIT threshold, both are sunk costs rather than marginal ones, and a conversion isn’t subject to NIIT in the first place.

The bottom line: judge a conversion on whether the tax payment does useful work leaving your estate, whether you can pay at Florida rates that your children would pay at New York or California rates, and what you want your heirs holding when the ten-year clock starts. Not on a bracket change that isn’t coming.

If this topic may affect your family, we’d be happy to evaluate how a Roth conversion fits within your overall retirement, tax, and estate plan while coordinating with your CPA to determine whether it supports your family’s long-term planning goals.

Important Disclosure
This material is for informational purposes only and does not constitute tax, legal, or investment advice, or an offer or solicitation to buy or sell any security. Tax rates and rules change and vary by individual circumstance; state figures shown are illustrative estimates and should not be relied upon for planning. Certain of the information contained herein has been obtained from third-party sources and has not been independently verified. It is made available on an “as is” basis without warranty. Residency and domicile determinations are fact-specific. Consult your own tax and legal advisors before acting.