What are common mistakes to avoid with IRA conversions?

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A conversion moves money from a pre-tax account such as a traditional IRA into a Roth IRA. You pay income tax on the amount converted, but once in the Roth the growth and qualified withdrawals are tax-free. Roth accounts also do not require lifetime minimum distributions (RMDs). Many people choose to convert so they can control when taxes are paid instead of waiting for future rates or RMDs to dictate the timing. However, there are frequent IRA conversion mistakes that can create expensive and unintended consequences.

Mistake 1: Ignoring income-based consequences such as health care costs and program eligibility

Many individuals focus only on the tax implications and forget that conversions increase taxable income for the year. A higher income level can affect health care premiums or benefits. For example, if you are on Medicare and your income increases due to a conversion, you may trigger the Income Related Monthly Adjustment Amount, which increases Part B and Part D premiums. These charges are based on taxable income brackets established by the Social Security Administration and are applied two years after the income occurs.

Retirees using Affordable Care Act marketplace plans can also see reductions or loss of premium tax credits if a conversion raises income. At tax filing, this can create a clawback where the taxpayer must repay credits they received earlier in the year.

Some retirees also rely on income-based programs such as prescription assistance, utility relief, property tax discounts, or reduced out-of-pocket costs. A single year of higher income from a Roth conversion can disqualify them from these programs. Before converting, taxpayers should evaluate what income-sensitive programs they use to avoid losing benefits unintentionally.

Mistake 2: Mishandling a backdoor Roth IRA when other pretax IRA balances exist

A backdoor Roth IRA is often used when income is too high for direct Roth contributions. The taxpayer contributes to a nondeductible traditional IRA, then converts that amount to a Roth. The mistake occurs when the individual has other pre-tax IRA balances. The IRS treats all traditional IRAs as one combined balance. This means that a conversion involving after-tax contributions is taxed using a pro rata formula, not selectively based on what you are converting.

For example, someone might contribute $7,000 to a new nondeductible traditional IRA, and subsequently convert $7,000 to a Roth IRA. However, if they already have $100,000 in a pre-tax traditional IRA, only a small percentage of the conversion will be tax-free. The remaining portion will be taxable. This creates years of basis tracking and complicates future IRA withdrawals.

Mistake 3: Converting too early in the year

Some people convert early so their Roth can potentially grow sooner. The problem is that you do not yet know your total taxable income for the year. If your income unexpectedly rises later through bonuses, capital gains, consulting income, home sales, or retirement account rollover decisions, your conversion amount could push you into a higher tax bracket.

Before 2018 you could undo a conversion through a recharacterization. That option is no longer allowed. Since the conversion cannot be reversed, many tax professionals prefer conversion toward year end when income is more certain and surprises are less likely. Good conversion timing helps prevent unnecessary taxes from arising in the same year.

Mistake 4: Forgetting to take required minimum distributions first

Individuals who are at the RMD age of 73 or above must satisfy their full required minimum distribution before converting any additional funds to a Roth IRA. The IRS states that an RMD cannot be converted into a Roth account. If someone tries to convert before withdrawing the RMD, the IRS will treat the conversion as an excess Roth contribution, which may result in penalty charges. Failure to take the RMD itself can lead to even more serious penalties, which some advisors refer to these informally as IRA Distribution Late Penalties. The combination of a missing RMD and improper conversion can create multiple layers of taxes and fees.

Therefore, those who are of RMD age must always withdraw the RMD first. Only after it is taken can additional funds be converted.

Mistake 5: Converting too much at one time

Some investors attempt to convert all their retirement funds in a single year. A large conversion can inflate taxable income, increase Medicare premiums, reduce tax credits, and raise the percentage of Social Security subject to tax. It may also push you into higher tax brackets today than you would have been in during retirement. A smarter Roth conversion strategy often converts small amounts over multiple years. This approach fills lower tax brackets gradually and avoids unnecessary surprises.

This method can also reduce future RMDs since the overall pre-tax balance declines. It aligns well with Tax Planning for Retirees because it allows taxpayers to smooth their tax burden rather than paying a large spike in a single year.

Final Thoughts

Roth strategies work best when a taxpayer understands all the moving parts. The key pitfalls relate to income-sensitive benefits, pro rata tax rules, conversion timing, RMD requirements, and converting too much too quickly. Whether comparing Roth IRA vs Traditional IRA savings or deciding how much to convert, careful planning helps retirees avoid these problems and gives them greater control over long-term taxes.

As Trump’s One Big Beautiful Bill continues to shape the broader tax landscape, many individuals are still navigating complex provisions affecting conversions and traditional retirement accounts. It’s often wise to consult a professional advisor such as BTCPA to assess these rules and determine the most efficient approach based on personal goals and tax exposure.

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