Not long ago, I was sitting with a retired Nassau County police officer in my Commack office going over his retirement accounts. Between his 401(k), deferred comp, and traditional IRA, he had an adequate nest egg. But when we projected his required minimum distributions (RMDs) into his 70s, the look on his face changed. What felt like a comfortable cushion suddenly looked like a future tax bomb.
That conversation almost always leads to the same topic: Roth conversions. For many Long Island retirees and pre‑retirees, especially those with large pre‑tax balances, understanding Roth conversions is one of the most important pieces of long‑term tax planning.
A Roth conversion is simply the process of taking money from a pre‑tax retirement account—like a traditional IRA or old 401(k)—and moving it into a Roth IRA. When you do that, the amount converted is treated as taxable income in that year. After the conversion, that money grows tax‑free, and qualified withdrawals down the road are also tax‑free under current law.
In plain language: you’re choosing to pay taxes now so that future you doesn’t have to. Many people across Long Island find this appealing if they’re worried that their pre‑tax accounts will force them into higher tax brackets in the future, or if they like the idea of building a pool of tax‑free assets they can tap later without worrying about the IRS taking a slice.
For a lot of folks, especially retired police officers and long‑time employees of large companies, most of their savings are stuck in an employer plan—401(k), 403(b), or a deferred comp plan. Those plans often have limited investment choices and may not give you the same flexibility for Roth conversions that an IRA does.
A common approach is to roll an old 401(k) into a traditional IRA when you leave the job or retire. Once the money is in an IRA, it’s generally easier to control investment choices, fees, and the timing and size of any Roth conversions. That flexibility can be useful if the goal is to gradually move money from “tax‑deferred” to “tax‑free” over a number of years, instead of waiting for RMDs to hit you all at once later in life.
Many pre‑retirees on Long Island look at their 401(k) or IRA balance and think, “I have a million dollars for retirement.” What gets missed is that the IRS owns a piece of that account. Every dollar in a pre‑tax account is a dollar that will be taxed someday, either when you take withdrawals, when RMDs kick in, or when your heirs take money out after you’re gone.
If most of your retirement savings are in pre‑tax accounts, you can end up with a situation where RMDs in your 70s and 80s push you into higher marginal brackets, raise your Medicare premiums, and limit your flexibility. Some people call that a “tax bomb”: the tax bill shows up later, just when you thought you were done worrying about this stuff. Roth conversions are one way people try to defuse that bomb over time instead of all at once.
Required minimum distributions start in your early 70s (depending on your birth year) and force you to take money out of traditional IRAs and pre‑tax employer plans whether you need the cash or not. Those forced withdrawals are taxable income, and as your account grows, the RMDs can become quite large, not because of anything you did wrong, but simply because the rules say, “It’s time.”
That extra income can do more than just increase your tax bill. It can also trigger something called IRMAA (Income‑Related Monthly Adjustment Amount), which is an extra surcharge added to your Medicare Part B and Part D premiums if your income crosses certain thresholds. Many retirees are surprised to find that their RMDs push their income high enough that Medicare starts charging more. It’s not a penalty in the moral sense, but it sure feels like one when your premiums suddenly jump.
Roth IRAs are treated differently. Under current rules, Roth IRAs don’t have RMDs during the original owner’s lifetime. That means building up a Roth bucket can give you more control over your taxable income later in life and reduce the chance that required distributions or IRMAA surcharges catch you off guard.
Right now, federal income tax rates are historically low by many measures. Many people expect that, over time, rates may drift higher, especially as the government looks for ways to address debt and spending. Nobody knows exactly what Congress will do, but it’s hard to build a long‑term plan assuming taxes will always stay this low.
That uncertainty is one reason some retirees on Long Island choose to do Roth conversions in years when their income is relatively modest in early retirement years, or after they stop working but before RMDs start. Paying tax at a known rate today, on their terms, can feel more manageable than gambling on what their bracket might be 10 or 15 years from now when RMDs and Social Security are fully in play. Without using conversions thoughtfully, long‑term tax planning can be a lot harder.
Because the amount you convert in a given year is treated as income, there’s a real risk of “overdoing it.” If someone in Commack converts a huge chunk all at once, they might unintentionally jump from one tax bracket into a much higher one, or trigger extra IRMAA charges. That’s usually not the outcome they had in mind.
A common approach is to look at the tax bracket thresholds for the year and decide how much room is left before crossing into the next bracket. Then conversions are done in pieces over several years—filling up the current bracket but trying not to spill into the next one. That kind of methodical pace is where detailed tax projections and careful coordination between investment and tax planning can really matter.
As attractive as “tax‑free later” sounds, Roth conversions aren’t automatically a good fit for everyone. If you’re in a very high income year, maybe get a big bonus, business sale, or have large capital gains, your marginal tax rate might already be steep. In that situation, some people prefer to use pre‑tax contributions and other strategies to shelter income rather than adding more income via a conversion.
There are also practical considerations: you need a way to pay the tax on the conversion, ideally from dollars outside the retirement account. Using the IRA or 401(k) itself to cover that tax bill can undercut the benefits, especially if you’re under certain ages or facing penalties. For some households, especially those expecting much lower income later in retirement, the math simply doesn’t favor converting large amounts today.
For many Long Island retirees, especially those with pensions, Social Security, and sizable pre‑tax balances—the appeal of Roth conversions comes down to control. A well‑planned series of conversions can help.
The key is that conversions happen as part of a broader retirement and tax plan, not just as a one‑off move because “Roth sounds good.”
Many people on Long Island find it helpful to see side‑by‑side projections: what life looks like if they never convert, versus a gradual Roth strategy over several years. Seeing how RMDs, IRMAA, and tax brackets interact on real numbers often makes the decision clearer.
If you’re thinking about this, the next step is usually to get a handle on your current bracket, your expected income in retirement, and how much pre‑tax money you’re carrying into those RMD years.
Chris Wargas is the founder of First Shelbourne, a Registered Investment Advisory firm based in Commack, New York. He is also a retired police officer, which gives him firsthand perspective on the retirement questions many NYPD, Suffolk County, and Nassau County officers face when evaluating pensions, deferred compensation plans, IRAs, and rollover options.
This article is provided for informational and educational purposes only and should not be construed as personalized investment, legal, tax, or accounting advice. Nothing in this article is intended as a recommendation or solicitation to buy, sell, or hold any security or to engage in any specific investment strategy.
Any discussion of rollovers, IRAs, Roth conversions, retirement income planning, or portfolio management is general in nature and may not be appropriate for every individual. Whether a rollover or other planning strategy makes sense depends on a person’s full financial picture, including tax considerations, time horizon, liquidity needs, and retirement goals.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
Advisory services are offered through First Shelbourne, a Registered Investment Adviser.