Blog

The Pennsylvania Roth Conversion Advantage

Most retirees treat state income tax as a footnote in the Roth conversion decision.

What federal bracket am I in today? How large will my required distributions get? How much can I convert without creating unnecessary Medicare costs?

Those are important questions, certainly.

But if you live in Pennsylvania and expect to move someday, there's another question that can change the math: Where will you live when these retirement dollars finally come out?

Because your answer could decide when you convert.

Pennsylvania Leaves Your IRA Alone

To be sure, Pennsylvania treats retirement money differently than the IRS does.

That’s because when you convert a traditional IRA to a Roth, the IRS taxes every pre-tax dollar that year. The Pennsylvania Department of Revenue, on the other hand generally doesn't.

And once you're 59½, Pennsylvania doesn't tax your traditional IRA withdrawals either.

Put those two rules together, and Pennsylvania takes nothing whether you convert or not.

So if you're staying in Pennsylvania, state tax isn't a factor in your Roth decision. The decision rests entirely on federal math like, your federal rate future required distributions, when Social Security begins and the like.

Pennsylvania only becomes a factor when you plan to leave.

The Opportunity Appears When You're Planning to Move

How so?

Well, suppose you expect to leave Pennsylvania in a few years to be closer to family, and your new state taxes IRA withdrawals.

Now you have a situation where there's a state tax to avoid.

On the other hand, if you convert while you're a Pennsylvania resident, then state takes nothing.

Wait until after the move, and your new state taxes your withdrawals.

And here’s the best part: Your IRA doesn't remember where you earned it.

Federal law says only the state you live in when the money comes out can tax it.

So then, once you leave Pennsylvania, your new state is the one with the claim. Note: the opposite also applies.

That's the real Pennsylvania Roth conversion advantage.

It isn't simply that Pennsylvania is tax-friendly.

Now here’s the thing, Pennsylvania doesn’t give you a few years to convert without a state tax bill.

That window closes the day you move.

While you're a resident of another state, you lose the benefit of Pennsylvania's tax treatment and become subject to that state's rules.

Consider a Pittsburgh Couple Planning to Move

Consider, for example, a hypothetical couple, both 63.

They recently retired in Pittsburgh with most of their savings in traditional IRAs. They plan to stay about four more years before moving closer to their grandchildren.

Their future state taxes IRA withdrawals. For simplicity, let's say those dollars would face a state tax rate of about 5%.

The first thing I wouldn't do is tell them to start converting $100,000 a year.

We start with the retirement-income timeline.

When does their paycheck stop completely?

When will Social Security begin?

How much income will their taxable portfolio produce?

How much will they need from their investments to support their lifestyle?

When will required minimum distributions begin?

What does their federal tax picture look like year by year?

And now there's another date on that timeline: When do they stop being Pennsylvania residents?

Only after we build that baseline do we start testing conversion amounts.

So then, let's say our analysis shows that converting $100,000 a year for four years fits their target federal bracket without creating side costs big enough to undo the benefit. They pay the tax from cash, so the full amount goes to work in the Roth.

Over four years, they convert $400,000.

The IRS still gets its share. Pennsylvania takes nothing.

Now consider the alternative.

They leave the same $400,000 in their traditional IRAs and withdraw it after they've moved.

At an illustrative 5% state rate:

$400,000 × 5% = $20,000.

That's about $20,000 in state tax on the same $400,000 of retirement money.

This example isolates the state-tax question on purpose. It assumes their federal rate would be about the same either way.

Real planning is messier.

Investment growth, federal brackets, deductions, Medicare premiums, Social Security taxation, future tax law, their new state's rules and the timing of withdrawals can all change the result.

The $20,000 isn't the conclusion.

It's the signal that there's something worth modeling.

This Changes How I Build the Conversion Timeline

Indeed, this is where knowing a tax rule and doing tax planning part ways.

Because knowing Pennsylvania doesn't tax the conversion is information.

The planning work is figuring out whether that fact matters for your household.

To be sure, in our planning process, we don't start with "How much should you convert?"

We start with the income timeline.

I want to see what your tax return could look like over the next 10 or 15 years before we deliberately add income to it.

We map when your paycheck stops, when Social Security and pensions start, and when Medicare enters the picture. We map when required distributions begin, how much your portfolio needs to provide, and how big your traditional IRA could get if we do nothing.

Then we model different conversion schedules.

One might involve no conversions.

Another might fill the remaining room in a target bracket.

Another might cross into the next bracket on purpose because the long-term result still looks better.

For a Pennsylvania client planning to relocate, I'd add one more point: What changes if we finish more of the conversions before the move?

This isn't just theory. Research by Edward McQuarrie and James DiLellio in the Journal of Financial Planning shows that conversion results hinge on your tax rate today versus later, how long the money has to grow, and where the cash to pay the tax comes from.

A move adds another tax rate to that math.

So then, instead of treating the move as a lifestyle decision over here and the conversion as a tax decision over there, we put them on the same timeline.

That's the coordination.

I'd Work Backward From the Move Date

Once a client has a real relocation plan, the analysis gets sharper.

For our couple, the move is about four years out.

Now we know the conversion window isn't unlimited.

We can work backward and start asking question like:

• What does taxable income look like this year?
• How much room is there before the next federal bracket?
• Will the added income trigger a Medicare surcharge down the road?
• Will Social Security start before the move?
• Is there cash on hand to pay the conversion tax instead of withholding it from the IRA?
• Could investment gains or losses change how much we want to convert?
• Should we convert the same amount each year, or does one year have a lot more room than another?
• And how sure are we about the move?

That last question matters.

Because tax planning shouldn't be built around a move you've only daydreamed about.

But if you've picked the destination, bought property or set a date, the move belongs in the plan.

Your move date can matter as much as your federal bracket.

The State-Tax Advantage Still Doesn't Make Every Conversion a Good Conversion

Now, none of this means you should convert as much as possible before you leave if you’re planning to move out of a tax-advantaged state like Pennsylvania.

Indeed, saving 5% in future state tax doesn't justify paying a much higher federal rate today, if there isn’t a long-term net gain.

Maybe another $100,000 would push a big chunk of income into a higher bracket with no net benefit.

Maybe it triggers a Medicare surcharge.

Maybe paying the tax would drain cash you need for the first few years of retirement.

Maybe your new state has its own break for retirement income.

Or maybe you're moving to a state with no income tax at all, where there's no state bill to get ahead of.

Any of those can shrink the advantage or erase it.

That's why I wouldn't compare Pennsylvania's zero to another state's headline rate and call the difference "savings."

Your new state's actual rules matter.

Your federal return matters.

The timing matters.

And the amount you convert matters.

A Roth conversion is still a multi-year tax decision, not a state-tax arbitrage trade.

Your Move Date Can Become Part of Your Retirement Tax Window

Now, i've written before about what I call the income tax valley. It's the stretch after your paycheck stops but before Social Security and required distributions start filling up your tax return.

For many retirees, those years offer rare control over how much taxable income they report.

A planned move out of Pennsylvania adds a second boundary to that window.

You have the federal window that retirement creates.

And inside it, you may have a Pennsylvania window. Inside that window, your conversion only answers to the IRS.

That changes how I think about the planning horizon.

Think back to our couple. They retired at 63, plan to move around 67, and won't face required distributions for years after that.

The question isn't just: How much can we convert before RMDs?

It becomes: How much, if any, should we convert before leaving Pennsylvania?

Those are different questions.

And the second one has an earlier deadline.

The Goal Isn't to Avoid State Tax at Any Cost

When it comes down to it, good retirement tax planning isn't about finding one tax to dodge and rebuilding your plan around it.

It's about coordinating the decisions you already expect to make.

Because if you're staying in Pennsylvania, the state's treatment of conversions won't tip your decision, given that your IRA withdrawals get the same break.

But if you already expect to move, leaving residency out of the analysis leaves out a variable that matters.

That's why the conversion decision should include more than your current bracket.

It should include your retirement-income timeline.

Your future required distributions.

Your Social Security and Medicare decisions.

Your cash-flow needs.

And, when it's relevant, where you'll live.

Because Pennsylvania gives you the rule.

But proper planning tells you whether the rule is worth using.

The Bottom Line

Pennsylvania doesn't tax your Roth conversion. Once you're 59½, it doesn't tax your IRA withdrawals either.

So staying put doesn't create a special state-tax reason to convert.

Planning to leave might.

What this means is that if you're moving to a state that taxes retirement income, don't build your conversion timeline around your federal bracket alone.

Put your move date on the same timeline.

Then find out how much of your tax window closes when you cross the state line.

Related Reading

A Roth Conversion Is Not the Goal

The Retirement Tax Window Most People Miss

Five Reasons Why a Roth Conversion Might Be Right for You

The Tax Bill You're Leaving Your Kids

Sources

Pennsylvania Department of Revenue, "Taxability of Roth IRAs According to PA Income Tax Rules."
https://revenue-pa.custhelp.com/app/answers/detail/a_id/274/~/taxability-of-roth-iras-according-to-pa-income-tax-rules

Pennsylvania Department of Revenue, PA Personal Income Tax Guide: Gross Compensation.
https://www.pa.gov/agencies/revenue/forms-and-publications/pa-personal-income-tax-guide/gross-compensation

Internal Revenue Service, Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
https://www.irs.gov/publications/p590a

Edward F. McQuarrie and James A. DiLellio, "The Arithmetic of Roth Conversions," Journal of Financial Planning, May 2023.
https://www.financialplanningassociation.org/learning/publications/journal/MAY23-arithmetic-roth-conversions-OPEN

Michael Kitces, "Why Moving To A Lower-Tax State Doesn't Always Result In Lower Taxes On Deferred Income."
https://www.kitces.com/blog/moving-lower-tax-state-income-employee-stock-options-iso-nonqualified-deferred-compensation/

Michael Kitces, "Harvesting Capital Gains Vs. Roth Conversions At 0% Tax Rates." https://www.kitces.com/blog/navigating-income-harvesting-strategies-harvesting-0-capital-gains-vs-partial-roth-conversions/

---

by Peter Donisanu, ChFC®, AIF®

The Withdrawal Order You Were Taught Can Quietly Cost You

There's a standard rule for which accounts you should spend first in retirement.

Spend the taxable brokerage account first. Then move to the traditional IRA or 401(k). Save the Roth for last.

There's logic behind that advice. Spending taxable assets first can allow your tax-deferred and tax-free accounts to continue compounding. It can also keep your taxable income relatively low in the first few years of retirement.

The problem is that retirement taxes aren't calculated one year at a time.

Follow that withdrawal order on autopilot, and you may spend years congratulating yourself for keeping your tax bill low while quietly building a much larger one for later.

That's because every dollar left growing inside a traditional IRA isn't simply money you've deferred paying tax on. It's also future taxable income that, eventually, you may no longer control the timing of.

And that changes the question you should be asking.

The question isn't:

Which account should I spend first?

It's:

Which account should fund the next dollar of spending this year, given what that decision may do to my taxes over the rest of my retirement?

That's a very different problem.

The Default Rule Solves for This Year's Tax Bill

The traditional withdrawal hierarchy exists for a good reason.

Suppose you retire with money spread among a taxable brokerage account, a traditional IRA and a Roth IRA. If you can meet your spending needs from the brokerage account without realizing much taxable income, your tax return may look remarkably clean.

Your traditional IRA continues growing tax-deferred.

Your Roth continues growing tax-free.

And your current tax bill stays relatively low.

Viewed one year at a time, that can look like smart tax planning.

Viewed over 20 or 30 years, it may not be.

Traditional IRA money eventually becomes subject to required minimum distributions. Under current law, the applicable RMD age is generally 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later. Once RMDs begin, an IRS formula sets a minimum amount that has to come out each year.

That means a retiree who spends aggressively from taxable assets while leaving a large traditional IRA untouched can unintentionally concentrate more and more of your future wealth inside the one account that eventually forces taxable income onto your return.

The mistake isn't tax deferral itself.

The mistake is assuming that more deferral is always better.

Sometimes Paying Tax Earlier Is the Tax-Saving Move

This is where retirement income planning gets counterintuitive.

For many higher-net-worth retirees, some of the most valuable tax-planning years arrive right after they stop working. The paycheck stops, bonuses and business income fade, Social Security may not have started yet, and required distributions haven't begun. Someone who spent decades in relatively high brackets can suddenly have several years in which surprisingly little ordinary income lands on the return.

I think of these as tax-planning windows, and I don't want to waste one simply because a retiree has enough sitting in a brokerage account to leave the IRA untouched. I wrote about this window in more depth in The Retirement Tax Window Most People Miss.

So this is one of the first places I look when building a retirement income strategy. We map the income already expected each year, pensions, Social Security, interest, dividends, capital gains and the rest, and then look at how much room remains inside the brackets we're willing to use.

That may lead us to intentionally recognize additional IRA income. Sometimes that means taking a traditional IRA distribution and actually spending the money. Other times it means converting part of the traditional IRA to Roth and funding lifestyle spending elsewhere. A Roth conversion generally causes previously untaxed traditional IRA dollars to be included in taxable income in the year of the conversion.

Either way, the objective is the same:

Pay tax on some of the IRA when you choose the timing, instead of waiting until the tax code chooses it for you.

Academic research on retirement withdrawals supports this approach. James DiLellio and Daniel Ostrov examined individualized withdrawal strategies across taxable, tax-deferred and Roth accounts and found that sequencing can materially affect portfolio outcomes, arguing specifically against relying on simple chronological withdrawal rules when tax brackets, RMDs and other variables change over time.

More recent work from Stanford goes one step further: these decisions should be recalculated as circumstances change rather than solved once at retirement, with the strategy updated each year based on current balances, taxes, investment outcomes and inflation. That's much closer to how I believe retirement income planning should actually work.

The Withdrawal Order Should Change From Year to Year

This is why I rarely think of retirement withdrawals as a fixed hierarchy.

I think of them as an annual coordination problem.

In a relatively low-income year, we may intentionally create taxable income from an IRA.

In another year, a large capital gain, pension payment, business transaction or other income event may already have filled the brackets we want to use. In that case, taxable assets or Roth dollars might make more sense for additional spending.

Once Social Security begins, we have another variable to coordinate.

Once Medicare begins, there's another.

Once RMDs begin, there's another.

The answer can change again after the death of a spouse, when the surviving spouse may eventually be filing under narrower single-filer tax brackets.

There's no account that's universally "first."

There's only the account that makes the most sense given the rest of that year's financial plan.

Consider Two Retirees With the Same $2 Million

Imagine two recently retired households.

Each starts retirement with $2 million.

Each has the same amount in taxable investments, traditional retirement accounts and Roth accounts.

Each spends the same amount.

Their investments earn the same returns.

The difference is how they decide where the spending money comes from.

Retiree One: Follow the textbook order

The first household follows the conventional rule.

The brokerage account comes first.

They sell investments as needed to fund retirement and leave the traditional IRA alone for as long as possible.

Their tax returns initially look terrific.

With no paycheck and relatively little ordinary income, they may spend several years in unusually low brackets.

But they aren't actually using those brackets for much of anything.

Meanwhile, the traditional IRA keeps compounding.

Eventually Social Security begins. Later, required minimum distributions begin.

Now the retiree has Social Security income, portfolio income and IRA distributions arriving on the same tax return.

And the IRA distribution is no longer entirely optional.

Retiree Two: Use the low-income years deliberately

The second household also uses the brokerage account for spending.

But each year, they look beyond the current tax bill.

While their taxable income is temporarily low, they intentionally take some money from the traditional IRA or convert part of it to Roth.

They may pay more tax in their 60s than the first retiree.

That's intentional.

Because they aren't trying to minimize taxes this year.

They're trying to manage taxes across retirement.

By the time required distributions begin, the second household has a smaller traditional IRA balance and more money sitting in accounts that provide greater flexibility.

Same starting wealth.

Same lifestyle.

Same investment environment.

Different tax path.

And potentially a materially different amount of wealth available over their lifetime.

The point isn't that Roth conversions automatically save taxes. They don't. Converting too much, converting at the wrong tax rate or ignoring other parts of the tax return can make a conversion counterproductive.

The point is that withdrawal sequencing changes the timing and rate at which your retirement wealth gets taxed, and that timing can matter substantially.

Medicare Adds Another Threshold to Watch

Tax brackets aren't the only line I watch. Medicare premiums move with income too.

Higher-income Medicare beneficiaries pay income-related surcharges, known as IRMAA, on Medicare Part B and Part D. Those surcharges generally use modified adjusted gross income from the tax return two years earlier. So a Roth conversion might lower future RMDs and raise a Medicare premium two years later.

That doesn't mean you should avoid the conversion. It means the IRMAA cost needs to be part of the calculation.

I raise this because retirement tax decisions often get reduced to a single rule: "Don't cross the next tax bracket," or "Don't trigger IRMAA." Neither is a complete strategy. I'd willingly cross a threshold today if the long-term math favored it, and I wouldn't convert an extra dollar simply because there's technically room left in a bracket. The goal isn't to fill brackets for the sake of filling brackets. It's to understand what today's marginal dollar of taxable income may save, or cost, you later.

Long-Term Map, Annual Decision

When I work through this decision with clients, I don't want to look only at this year's tax return. And I don't want to rely solely on a 30-year retirement projection either. You need both.

First, we build the longer-term retirement income map: when employment income stops, when Social Security might begin, what pension income exists, how large the tax-deferred accounts could become and when required distributions are likely to enter the picture. That helps identify where the potential tax-planning windows exist. I walk through building that map in The Tax Cost of Retiring Without a Retirement Income Map.

Then we bring the decision back to the current year. How much ordinary income is already on the return? How much capital gain are we recognizing? What deductions are available? Are we approaching a Medicare threshold? Is there charitable giving to coordinate? What's changed since the long-term projection was built?

That annual review matters because a 20-year tax projection isn't a promise. Tax laws change. Markets change. Income, spending and the portfolio all change. So should the withdrawal strategy.

That's why I don't think the right question is, "What's my retirement withdrawal order?" The better question is:

What should my withdrawal order be this year?

The Coordination Is the Plan

The textbook withdrawal order, taxable, then tax-deferred, then Roth, is useful as a starting point. It isn't a retirement income strategy.

The retirees who have the greatest flexibility are often the ones who recognize that every account represents a different future tax choice. A taxable account gives you one set of choices. A traditional IRA gives you another. A Roth gives you another. Which assets you hold inside each is a related decision, one I cover in Asset Location: The Retirement Tax Mistake Hiding in Plain Sight.

The goal isn't to empty those accounts in some predetermined sequence. It's to coordinate them so that you can fund the life you want while controlling when and how much taxable income shows up along the way.

That may mean deliberately paying more tax in certain years. It may mean leaving a tax bracket partially unused in another. It may mean converting IRA dollars before Social Security begins, or using Roth assets during an unusually high-income year. And it means revisiting the decision every year rather than setting the withdrawal order on the day you retire and never looking at it again.

The standard withdrawal order is a default, not a decision.

Decide the order while you still have the ability to choose.

Because once required distributions begin, part of that choice has already been made for you.

Sources

Internal Revenue Service, Retirement Plan and IRA Required Minimum Distribution FAQs:
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Internal Revenue Service, Retirement Plans FAQs Regarding IRAs (including Roth conversions):
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras

Social Security Administration, Medicare Premiums and income-related adjustments:
https://www.ssa.gov/benefits/medicare/medicare-premiums.html

Centers for Medicare & Medicaid Services, 2026 Medicare Parts A & B Premiums and Deductibles fact sheet:
https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles

DiLellio, James, and Daniel Ostrov, "Toward Constructing Tax Efficient Withdrawal Strategies for Retirees with Traditional 401(k)/IRAs, Roth 401(k)/IRAs, and Taxable Accounts" Financial Services Review
https://openjournals.libs.uga.edu/fsr/article/view/3419

Johansson, Kasper, and Stephen Boyd, "A Tax-Efficient Model Predictive Control Policy for Retirement Funding," Journal of Retirement
https://web.stanford.edu/~boyd/papers/retirement.html

---

by Peter Donisanu, ChFC®, AIF®

The Roth Conversion Five-Year Rule That Can Cost You 10%

You did the smart thing.

You retired, your income dropped, and you used that opportunity to convert part of your traditional IRA to a Roth. You willingly paid the income tax today so that those dollars could potentially grow tax-free for the rest of your life.

Then, a couple of years later, you need some of the money.

You take a withdrawal from the Roth, assuming the logic is simple: I already paid tax on this money. It should be mine to use.

And then you discover that the IRS may want another 10%.

Not another income tax. A 10% additional tax for taking converted dollars out too soon.

That outcome feels especially counterintuitive because Roth conversion planning is often most attractive during the lower-income years immediately after retirement. Those are precisely the years when someone in their early or mid-50s may be trying to reduce a large pre-tax retirement balance before Social Security, required minimum distributions, or other income sources begin.

But there is an important catch.

Paying the tax on a Roth conversion changes the tax character of your money. It does not necessarily change when you can access it without penalty.

In other words, a Roth conversion changes your tax bill, not your timeline.

Why Converted Money Has Its Own Five-Year Clock

To understand the rule, it helps to understand why it exists.

Normally, someone who takes a taxable distribution from a traditional IRA before reaching age 59½ may owe ordinary income tax plus a 10% additional tax unless an exception applies. If that person could simply convert the traditional IRA to a Roth, pay the income tax on the conversion, and withdraw the converted dollars the next day without the additional tax, the conversion could become a side door around the early-distribution rules.

Congress specifically addressed that problem when the Roth rules were developed. The legislative history describes the conversion holding period as a way to prevent taxpayers from using a Roth conversion to receive premature retirement distributions while avoiding the early-withdrawal tax (House Conference Report 105-356).

That is where the five-year conversion rule comes in.

Under current IRS rules, each Roth conversion generally starts its own five-tax-year period. That period begins January 1 of the calendar year in which the conversion occurs, regardless of when during that year you actually complete the conversion. So a conversion completed in December 2026 is treated as beginning its five-year period on January 1, 2026.

If you are under age 59½ and withdraw converted dollars during that five-year period, the portion attributable to the amount that was taxable when converted may be subject to the 10% additional tax unless another statutory exception applies.

That last part matters. The penalty does not mean the converted amount becomes taxable income again. You already recognized the taxable portion when you completed the conversion. Instead, the rule effectively brings that previously taxed conversion amount back into the calculation for purposes of determining the 10% additional tax.

And if you complete conversions in multiple years, the clocks begin stacking.

Convert in 2026, and that conversion has one clock. Convert again in 2027, and that conversion gets another. Convert again in 2028, and now you have three separate conversion periods running at the same time.

The ordering rules make the sequence predictable. The IRS generally treats Roth IRA distributions as coming from regular contributions first, followed by conversions and rollovers on a first-in, first-out basis, and finally earnings. Within a particular conversion, the taxable portion is generally considered distributed before the nontaxable portion (see IRS Publication 590-B).

That ordering becomes particularly important if you are building what is commonly called a Roth conversion ladder.

There Are Really Three Roth Buckets

Part of the confusion around the Roth five-year rules comes from talking about a Roth IRA as though every dollar inside it works the same way.

It does not.

For distribution purposes, it helps to think about three different buckets.

Start with your regular Roth contributions. Your original direct Roth IRA contributions generally come out first under the ordering rules, and you can generally withdraw them without income tax or the 10% additional tax.

Next come your converted dollars. Conversion and rollover amounts come out after your regular contributions. Each conversion carries its own five-year period for the conversion-related 10% additional tax if you are under 59½, and that penalty generally applies only to the portion that was taxable when you converted.

Earnings come out last. Whether your earnings can be distributed tax-free depends on the separate rules for a qualified distribution, including whether the applicable Roth IRA five-year period has been satisfied and whether you have reached age 59½ or meet another qualifying condition.

That distinction is one of the most important parts of Roth planning because there is not simply one universal “Roth five-year rule.”

There is a conversion-specific five-year rule designed to determine whether the 10% additional tax can apply to converted principal withdrawn before age 59½. Separately, there is an account-level five-year requirement used to determine whether a Roth distribution, including earnings, is a qualified tax-free distribution.

Those rules often get blended together in casual explanations.

They should not be.

Age 59½ Changes the Conversion Rule

There is also an important off switch.

Once you reach age 59½, the conversion-specific 10% additional tax no longer applies merely because you are still inside a conversion's five-year period. Reaching age 59½ is one of the exceptions expressly identified by the IRS.

That means this particular trap matters most for people who retire early and begin Roth conversions in their 50s.

If you retire at 53, 55, or 57 and start converting a meaningful portion of a traditional IRA, liquidity planning becomes especially important. You may be deliberately recognizing income during a favorable planning window while simultaneously creating converted Roth dollars you do not want to rely on immediately for spending.

If you begin converting at 61 or 62, the conversion-specific early-distribution penalty is no longer the same concern because you have already crossed 59½. But the separate qualified-distribution rules can still matter, particularly when earnings are involved.

This is exactly why Roth conversions should not be done in isolation. The amount you convert is only one part of the decision. You also need to understand where your spending money will come from while those converted dollars are aging.

Consider a 55-Year-Old Early Retiree

Consider a hypothetical 55-year-old woman who recently retired after a successful career.

She has a sizable traditional IRA and expects her taxable income to be unusually low for the next several years. She sees that period as an opportunity to start reducing the amount of money that could eventually be exposed to required distributions later in retirement.

So she converts $80,000 from her traditional IRA to a Roth IRA.

Assume the full $80,000 is taxable as ordinary income. She pays the tax on the conversion that year, intentionally, because she believes shifting the money into a Roth will give her greater flexibility over the long run.

Two years later, her roof needs to be replaced.

The project costs $40,000.

She looks at the Roth account and thinks, I already paid tax on that money. Why not use it?

Assume for purposes of this example that she has no remaining regular Roth contribution basis ahead of the conversion under the IRS ordering rules, the $40,000 distribution is attributable entirely to the taxable portion of that recent conversion, and no exception to the early-distribution tax applies.

She takes out $40,000.

Because she is still under age 59½ and the conversion is still inside its five-year period, that $40,000 may be subject to a 10% additional tax.

That is $4,000.

She does not owe ordinary income tax on that same $40,000 again. The problem is the additional tax triggered by taking the converted money out too soon.

Now change one fact.

Suppose she waits until age 60 and takes the same $40,000 from that converted principal. She has crossed age 59½, so the conversion-related 10% additional tax no longer applies.

Or suppose she is still 57 but has enough regular Roth contribution basis available to cover the $40,000. Because regular contributions come out before conversion dollars under the ordering rules, that withdrawal could produce a very different result.

Or perhaps she pays for the roof from a taxable brokerage account instead. Selling investments there could create capital gains taxes depending on her basis and the investments sold, but it would not trigger the IRA's 10% early-distribution tax.

Same financial need. Different bucket. Different tax outcome.

The Roth conversion itself was not the problem. Touching the wrong dollars at the wrong time was.

A Conversion Plan Needs a Liquidity Plan

This is where Roth conversion planning starts to look less like a tax transaction and more like retirement income planning.

It is easy to focus entirely on the conversion calculation. How much room do I have in this tax bracket? How much should I convert this year? How might the conversion affect Medicare premiums later? How much could I reduce future required distributions?

Those are important questions. But there is another one that matters just as much: where will I get cash if something unexpected happens during the next five years?

If you are retiring before 59½ and planning several years of conversions, you may need a liquidity bridge alongside the conversion strategy. That could mean maintaining an appropriate cash reserve. It could mean deliberately preserving assets in a taxable brokerage account. It could mean knowing exactly how much regular Roth contribution basis you have available. It could mean sequencing conversions around known large purchases instead of automatically converting the maximum amount every year.

The point is not that converted Roth money can never be accessed early. There are exceptions to the 10% additional tax, and each taxpayer's facts matter.

The point is that you should not discover the distribution rules for the first time when the roof starts leaking.

The Five-Year Rule Is a Problem to Solve Before You Convert

A Roth conversion can be an incredibly useful planning tool.

It can help move retirement savings from an account where future distributions may be taxable into one where qualified future distributions may be tax-free. It can reduce future pre-tax balances, create greater flexibility over retirement income, and potentially improve how assets ultimately pass to heirs.

But none of those benefits mean every converted dollar should immediately be treated as available spending money.

That is why the five-year conversion rule is something to solve before you execute the conversion. Know which dollars live in which bucket. Know which five-year period applies. Know when age 59½ changes the rules. And most importantly, know where the next several years of spending will come from before deliberately moving money across the tax wall.

Because a Roth conversion changes your tax bill. It does not necessarily change your timeline.

And when conversions are part of a broader retirement strategy, that timeline should include more than projected tax brackets. It should include your actual life: the house, the travel, the family support, the unexpected expenses, and the cash you may need along the way.

If you are considering Roth conversions in your 50s, map your conversion schedule and your cash needs on the same timeline before you execute. That conversation often tells you far more than simply asking, how much should I convert this year? It is also how we help clients move through these decisions with clarity, confidence, and peace of mind.

Sources

Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
https://www.irs.gov/publications/p590b

Internal Revenue Service. Instructions for Form 8606, Nondeductible IRAs.
https://www.irs.gov/instructions/i8606

Internal Revenue Service. Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
https://www.irs.gov/instructions/i5329

U.S. Government Publishing Office. House Conference Report 105-356.
https://www.govinfo.gov/content/pkg/CRPT-105hrpt356/pdf/CRPT-105hrpt356.pdf

---

by Peter Donisanu, ChFC®, AIF®

The Tax Cost of Retiring Without a Retirement Income Map

You can have more than enough money to retire and still pay more in taxes than you expected.

The problem often isn't how much you've saved. Instead, it's how you decide to turn those savings into income.

During your working years, that decision was mostly made for you. Your paycheck arrived, taxes were withheld, and the remaining money funded your lifestyle.

Retirement changes that.

Now, you may have a traditional IRA, a taxable investment account, Roth assets, cash reserves, Social Security, a pension, and perhaps other sources of income available to you. The question is no longer simply whether you have enough.

You have to decide which dollars should fund each year of retirement.

And that's where tax planning and financial planning begin to overlap.

Retirement income shouldn't be pulled randomly from whichever account is most convenient. Before the paycheck stops, you need a retirement income map that shows where your cash flow will come from, when you'll take it, and what each decision may do to the rest of your financial plan.

Your Accounts Don't All Spend the Same on Your Tax Return

At first glance, a dollar is a dollar.

If you need $200,000 from your portfolio this year, you might assume it doesn't particularly matter whether the money comes from an IRA, a brokerage account, cash, or a Roth IRA.

But the tax return sees those dollars differently.

Generally, taxable distributions from a traditional IRA are included in ordinary income. Meanwhile, when you sell an investment in a taxable brokerage account, you're generally taxed on the gain relative to your adjusted cost basis rather than simply on the entire amount of cash you receive. Qualified Roth IRA distributions generally aren't included in taxable income.

Pension income can create another layer. Depending on how the pension was funded, payments may be fully taxable or may include a nontaxable return of after-tax contributions.

Then there's Social Security.

Depending on your other income, as much as 85% of your Social Security benefits can become included in taxable income. That doesn't mean you're paying an 85% tax rate on Social Security. Instead, it means other income can cause a greater portion of the benefit to become subject to federal income tax.

For retirees on Medicare, higher income can have another consequence. Modified adjusted gross income is also used to determine whether Medicare's income-related monthly adjustment amount, or IRMAA, applies to Part B and Part D premiums. In general, those calculations rely on tax-return information from two years earlier.

So, one large IRA withdrawal may do more than create taxable income.

It can affect the taxation of Social Security. It can influence Medicare premiums in a future year. It can change the tax treatment of investment income. And, depending on what you don't withdraw today, it can influence the size of future required distributions from tax-deferred accounts.

That's why I don't think retirement-income planning should begin with the question, "Which account has the money?"

The better question is, "What income do we want to create this year, and which accounts should create it?"

Consider a Couple With $5 Million Saved for Retirement

Imagine a recently retired couple in their late sixties with approximately $5.2 million in investable assets.

They have $3.1 million in traditional IRAs and retirement accounts, $1.3 million in a taxable investment portfolio, $500,000 in Roth accounts, and $300,000 in cash and short-term reserves.

Between Social Security and a small pension, they receive roughly $100,000 of annual income. However, their lifestyle, travel, charitable giving, family support, taxes, and other expenses require another $200,000 from their portfolio.

That's a much more realistic retirement-income question for a high-net-worth household.

They need $200,000.

Where should it come from?

The simplest answer might be the IRA.

After all, that's what the IRA was built for. So, they could call their custodian, withdraw $200,000, have taxes withheld, and move on.

Operationally, that works.

From a planning perspective, however, we haven't answered nearly enough questions.

Assuming the entire distribution is taxable, that $200,000 IRA withdrawal would add substantially more ordinary income to their tax return. It may also cause more of their Social Security benefits to become taxable and could affect future Medicare premiums.

Now consider that their taxable investment account contains securities with significant cost basis.

Instead of taking the entire $200,000 from the IRA, perhaps the retirement income map calls for $90,000 from the IRA, $80,000 from selected taxable investments, and $30,000 from existing cash reserves.

They still receive the same $200,000 needed to fund their lifestyle.

However, the tax result could be very different.

The $80,000 brokerage withdrawal isn't automatically $80,000 of taxable income. If, for example, the investments sold have a relatively high cost basis, only the realized gain is generally considered when calculating the capital gain from the sale.

Meanwhile, the cash reserve itself doesn't create income simply because it's transferred from a savings account into checking, although interest earned on that cash may already be taxable.

The important point isn't that this particular combination is the "right" answer.

It may not be.

The point is that the decision should be intentional.

Sometimes the Right Answer Is to Pay More Tax Today

This is also where retirement-income planning can easily become too simplistic.

If the goal were merely to minimize this year's taxable income, you could conclude that retirees should avoid traditional IRA distributions whenever cash, high-basis investments, or qualified Roth distributions are available.

I don't think that's the right way to look at it.

Sometimes intentionally creating taxable income today can improve the long-term plan.

For example, the years after retirement but before required minimum distributions begin may give a household more control over its taxable income than it will have later. If most of a couple's wealth is sitting inside traditional retirement accounts, taking additional distributions or completing Roth conversions during lower-income years may reduce the amount left in those accounts later.

So, the goal of a retirement income map isn't necessarily to pay the least tax this year.

The goal is to make informed decisions about when the family pays tax, which assets create the tax, and how today's decision affects the years ahead.

That's an important distinction.

Tax minimization looks at one return.

Retirement-income planning looks at the timeline.

A Retirement Income Map Connects the Years

When we think about retirement planning, it's tempting to divide everything into separate decisions.

When should I claim Social Security?

How much should I take from my IRA?

Should I sell investments from my brokerage account?

Should I convert money to a Roth?

How much cash should I keep?

Individually, those are reasonable questions.

However, they're really pieces of the same decision.

A retirement income map brings them together.

Before retirement, I want that retirement income map to show what the household expects to spend, which income sources turn on automatically, which sources we control, how much taxable income we're intentionally creating, and what the decision may mean several years down the road.

For example, one year may call for heavier taxable-account withdrawals.

Another may be an attractive year to recognize more IRA income.

Another may offer room for a Roth conversion.

Later, Social Security, pensions, required distributions, or other income sources may reduce that flexibility.

The strategy can also change as tax laws, portfolio values, spending needs, and family circumstances change.

That's why a retirement income map isn't a one-time withdrawal schedule.

It's a framework for making better annual decisions.

The Details Matter

This is also where experience and careful tax analysis matter.

Not every traditional IRA dollar is necessarily taxable if the account owner has nondeductible basis. Not every brokerage withdrawal creates the same capital gain because cost basis and holding periods differ. Pension taxation can vary depending on after-tax contributions. Capital losses may offset certain gains. State taxation may differ from the federal rules discussed here.

That's why broad rules of thumb such as "spend taxable accounts first" or "always delay IRA withdrawals" can be misleading.

There isn't one universally correct withdrawal order.

The right sequence depends on the household's balance sheet, tax return, age, income sources, spending needs, estate goals, and what you're trying to accomplish over the next several years.

That coordination is the work.

Build the Retirement Income Map Before You Need the Money

Retirement shouldn't begin with a series of disconnected withdrawal decisions.

If you wait until you need cash and simply pull money from whichever account is easiest, you're allowing convenience to make a tax decision for you.

Instead, start before retirement.

Look at the next several years. Identify the income that will arrive automatically. Estimate the cash flow you'll need from your portfolio. Then determine which accounts can provide that money and how those withdrawals may affect the rest of the plan.

Some years, the answer may be the IRA.

Other years, it may be the brokerage account, cash reserves, Roth assets, or a combination of several sources.

What matters is that you've made the decision deliberately.

Because once you retire, your portfolio isn't simply a collection of accounts anymore.

It's your paycheck.

And if you're going to be responsible for creating that paycheck for the next 20 or 30 years, you should know where each year's income is coming from before you spend it.

That's the purpose of a retirement income map.

Sources

Internal Revenue Service, Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs);
https://www.irs.gov/publications/p590b

Internal Revenue Service, Publication 915: Social Security and Equivalent Railroad Retirement Benefits;
https://www.irs.gov/publications/p915

Internal Revenue Service, Topic No. 409: Capital Gains and Losses;
https://www.irs.gov/taxtopics/tc409

Internal Revenue Service, Publication 575: Pension and Annuity Income;
https://www.irs.gov/publications/p575

Social Security Administration, Modified Adjusted Gross Income and Medicare IRMAA;
https://secure.ssa.gov/poms.nsf/lnx/0601101010

---

by Peter Donisanu, ChFC®, AIF®