How a Roth conversion can protect your heirs and your spouse

When I talk to clients about Roth conversions, one of the most important benefits I highlight isn’t necessarily about their own retirement; it’s about protecting their heirs.  In my experience, many people don’t consider the big picture when considering Roth conversions, which is really a generational one.

The rules around required minimum distributions have changed significantly with the passage of SECURE Act 2.0, and those changes can have real tax implications for beneficiaries.

Under the current rules, most non-spousal heirs generally have to withdraw the full balance of an inherited IRA by the end of the tenth year following the original owner’s death. That might sound simple enough, but the tax consequences can be harsh.

Imagine inheriting a large pre-tax IRA. While most heirs will be required to take annual distributions over ten years, there is likely to be a large lump sum still left at the end of the required period needing to be withdrawn without some proactive planning. All of the income from those distributions stack on top of the heirs own, potentially pushing you into a much higher tax bracket.  This is especially true in that final year when the full remaining balance has to come out.

That’s where Roth conversions can play a big role. If the original owner converts some of that pre-tax money to a Roth IRA while they’re still alive, even if it means paying a higher tax rate today, they can effectively smooth out that tax burden for their heirs.

The money will still have to be distributed within ten years, but they won’t have annual distribution requirements and won’t owe taxes on those withdrawals. Even at an elevated tax rate now, the overall family tax bill across generations can end up being significantly lower, which means more money stays with your loved ones and less goes to the IRS.

The Widow’s Tax Trap

Roth conversions can also be a valuable planning tool for married couples, especially when there’s a significant age gap or meaningful health concerns for one spouse.

Let’s say a couple has about $200,000 in taxable retirement income, most of which comes from Required Minimum Distributions. As a married couple filing jointly, they might fall in the 22% or 24% tax bracket. But if one spouse passes away, that same $200,000 of retirement income could push the surviving spouse into the 32% bracket as a single filer.

This is a common scenario I see; what I call the “widow’s tax trap.”

After the first spouse dies, the survivor often ends up with similar income, given they often assume the deceased spouse’s retirement accounts, but a tighter set of tax brackets to work with. If we take advantage of the lower married filing rates now by converting to Roth gradually - filling up that 22% or 24% bracket without spilling into a higher one - we can help avoid higher tax rates later when one spouse is on their own by reducing the taxable Required Minimum Distributions.

Recently, I worked with a couple that perfectly illustrated this.

The husband had a large pre-tax IRA balance and was about ten years older than his wife. We modeled several scenarios, including a series of strategic Roth conversions over multiple years. Even assuming today’s tax rates hold, the total lifetime tax savings for the family was projected to be in the hundreds of thousands of dollars. Most of the difference came from the higher tax rate applied to the surviving spouse’s much smaller Required Minimum Distributions.

Of course, tax laws change and no one can predict the future, but the general principle holds that paying some tax today can prevent paying a lot more later.

That said, Roth conversions aren’t right for everyone.

If someone is already in the top tax bracket (and their heirs are too) the case for converting gets weaker. Similarly, if a person is going to spend down most of their retirement funds during their lifetime or has relatively small balances while in lower tax brackets brackets, the benefits are minimal.

In other words, this strategy tends to make the most sense when legacy planning is a key objective, and there’s no concern about where the next paycheck for living expenses is coming from.

Another important point is, if possible, it’s almost always better to pay the tax on the conversion using assets outside the IRA.

That way, you’re preserving the entire converted balance to grow tax-free inside the Roth. Using IRA funds to pay the tax means less money gets converted and less grows tax-free over time. Liquidity outside the retirement accounts makes this strategy far more efficient.

Timing Is key

So, when should you actually do the conversion?

In a perfect world, you’d do it during a market downturn. You’re effectively transferring more shares at a lower value, and when the market recovers, all that growth happens inside the Roth, tax-free.

Of course, we don’t live in a perfect world, and it’s easy to get “too cute” trying to time things. In practice, most conversions happen toward the end of the year, when you have a clear picture of your total income and can coordinate with your tax advisor. That’s when we can make informed decisions about how much to convert without overshooting into a higher bracket.

Sometimes it makes sense to spread conversions over multiple years to fill up those favorable brackets - 22%, 24%, and so on - without bumping into the next one. This gradual approach hedges against future tax-rate risk and keeps your broader financial goals intact.

The key takeaway is that Roth conversions shouldn’t be viewed as a one-year tax move; they’re part of a long-term, multi-generational plan.

By thinking in terms of total lifetime taxes for the entire family, rather than just what happens on this year’s return, we can make smarter, more strategic decisions.

In my experience, the families who benefit most from Roth conversions are the ones willing to look beyond the immediate numbers to take that holistic, forward-looking approach. After all, good planning isn’t just about what you keep, it’s about what you leave behind, and how efficiently you leave it.