The 4 Most Common Roth Conversion Mistakes

These are 4 mistakes to avoid when converting retirement funds to Roth.

“Smart!” “Brilliant!” “A no-brainer” “SO glad I did it!”

These are the kinds of comments we routinely hear about Roth conversions.

However, it’s easy to forget that this popular retirement planning practice can actually backfire on you…if you forget certain realities or don’t do it carefully. 

That’s the subject of this blog post (and video): avoiding the four most common Roth conversion mistakes.

Roth Conversion Mistake #1: Not Taking Full Advantage of Your Tax Bracket

The first mistake some people make when doing Roth conversions is not taking full advantage of their tax bracket.

Quick review: The way Roth conversions work is that you take a portion of money from your traditional retirement savings account and move it over into a Roth account. Basically, you go ahead and pay taxes on that money now—whatever amount you convert is regarded by the IRS as taxable income—so that you won’t have to pay taxes later.

The good news here is that you can “convert” as much as you want. The only real limit is the amount of taxes you want to pay. For example, you could move $600,000 all in one year if you wanted to. (Although that might not be wise, since it would propel you into the top tax bracket.) 

The mistake I see a lot of people make is not paying attention to their tax bracket status. 

Ideally, you want to figure out what your income will be for the year—and see what tax bracket that puts you in. Then you want to ask, “How much additional income could I have and still remain in this bracket?” 

Or, if you’re comfortable going up a bracket, ask, “How much income could I receive and still be under the income limits for that bracket?” 

Bottom-line, you want to figure out the tax rate you’re comfortable with, then maximize the limits allowed for that bracket.

Most of the people we talk with want to keep their federal taxes at the 22% level. If you’re married filing jointly, the maximum income allowed for the 22% bracket is $190,750. 

If that’s the tax rate you and your spouse are comfortable with, then you’d add up all your regular income. Let’s say that total comes to $170,750. That means you still have “room” within the 22% tax bracket to Roth convert $20,000 of your traditional money.

Convert more than that, and you jump up into the 24% bracket. Convert less than that and you fail to take full advantage of the 22% tax bracket. (Wise planning always seeks to capitalize fully on tax-saving opportunities.) 

Some people are okay with going up to the 24% bracket. In that case, the maximum allowable joint income is $364,200. This creates room to convert even more traditional money to Roth. 

Why might someone wish to do this? One reason is that in 2025, the Trump tax cuts are scheduled to expire. Unless Congress makes them permanent, we will revert to the old tax rates. The 22% rate will jump up to 25%. The 24% tax bracket will go back to 28%. 

That means you only have a couple more years to take advantage of the lower rates. If that’s your thought process, you’ll want to convert as much as you can to Roth. And in doing so, it’s smart to take full advantage of the way the tax brackets are structured.

Roth Conversion Mistake #2: Not Factoring In Other Distributions

A second mistake we see people make is not factoring in other distributions they must make throughout the year

Let’s say that early in the year, you do all your “tax bracket math” (like we talked about above). You calculate your likely income and then decide to do a Roth conversion of $75,000 to “max out the tax bracket” you’re in.

But then around summer, you realize “We need a new car.” If your only source for that big purchase is your traditional account…and if you’re already at the top of your tax bracket because of the Roth conversion you did…then another distribution (i.e., withdrawing funds to buy the new vehicle) is going to push you up into a higher tax bracket.

The lesson? Think carefully about all the potential distributions you may need in any given year. Figure that out and work it into your Roth conversion plan. 

If this is a legitimate concern for you, it may make sense to do your Roth conversions later in the year. The benefit of this approach is that by the end of the year, you usually have a more accurate sense of all your distributions. Consequently, any conversions are less likely to create tax problems.

Roth Conversion Mistake #3: Not Factoring In Medicare Premiums

A third mistake we see people make is not factoring in their Medicare premiums

Here’s what that means. When you opt-in for Medicare (at age 65 or older), your premiums are based on your income two years prior.

So, if you’re 65 in 2023, Medicare looks at your yearly income from 2021. If you’re married, filing jointly, and your income is $194,000 or less, you qualify for the standard Medicare premium (i.e., $164.90/monthly in 2023).

However, if your income falls between $194,001 and $246,000, you’ll have to pay $230.80 for your Medicare coverage. (The premiums rise with your income.) 

Remember—when you convert funds to Roth, you’re artificially making your income higher than it would have otherwise been. This can inadvertently result in a Medicare premium increase.

This doesn’t mean you should avoid Roth conversions just to keep your Medicare premiums from increasing by $67 per month. Most of the time, the overall tax savings you’ll realize from Roth conversions will more than offset a $67 monthly increase in your Medicare premiums. Still, you need to be aware of this possibility and plan accordingly. 

Roth Conversion Mistake #4: Failing to Take Advantage of Charitable Giving Rules

The fourth mistake is not capitalizing on charitable giving rules

Specifically, if you’re a person who likes to support your church and/or various charities and you have money in your traditional accounts when you reach the age of 70 and a half, you can do what’s called a qualified charitable distribution (QCD). This is where you send money directly from your traditional IRA to the group(s) you want to support and you don’t have to pay any taxes on that money. 

However, if you have converted everything you can to Roth and don’t have any traditional money left, any charitable giving you do will have to come from your checking account. And because the standard deduction is now so high (in 2023, it’s $27,700), fewer couples filing jointly are able to itemize. This means you may not get a charitable tax deduction.

However, doing a qualified charitable distribution does get you a tax write-off, even if you’re using the standard deduction. But again, you can only do this if you still have some traditional money. 

So, as you get your Roth conversion plan together, and you’re moving a lot of your traditional money, remember to keep some of the traditional back if your goal is to be charitable later in life. 

In short, if you’re charitably-minded and over 70 and a half, this is a way you can stop giving monthly from your checking account, make a once-a-year distribution from your traditional IRA, and save some tax money in the process.

At Christy Capital, we believe Roth accounts are an important piece of your retirement planning. If you’re worried that maybe it’s too late for you, then watch this video: Is It Too Late to Start Roth TSP?.

About the Author

Mel Stubbs is a Financial Planner and educator at Christy Capital who works with federal employees all over the country, teaching them how their retirement system works and how to plan for retirement using their available benefits.