A Strategic Advantage in a Changing Tax Landscape
High-earning professionals face a unique tax challenge: success often brings complexity. As income rises, so do tax responsibilities, exposure to future tax-rate uncertainty, and the risk of compounding tax costs later in life. One strategy that deserves serious consideration in a high-income household’s long-term plan is the Roth conversion.
A Roth conversion allows you to reposition assets from traditional retirement accounts into a Roth IRA by paying taxes today in exchange for future tax-free income. While this concept benefits many savers, it can be especially powerful for those with substantial pre-tax balances who anticipate high taxable income in retirement.
Let’s examine why high earners should still consider conversions, even though they are already paying higher tax rates today.
Future Tax Flexibility and Control
The Core Benefits: Why Roth Conversions Matter
Traditional retirement assets grow tax-deferred, but every dollar withdrawn in retirement is taxed as ordinary income. For households with significant retirement savings, this creates the risk of involuntary high income in later years due to required minimum distributions (RMDs). Roth assets, however, are not subject to RMDs for the original owner.
Increasing your Roth balance now gives you the flexibility to:
• Manage taxable income in retirement
• Control tax brackets strategically
• Avoid surprise increases in tax liabilities
• Allocate withdrawals tax-efficiently
For individuals who plan to fund major goals in retirement, such as travel, philanthropy, or gifting to family, having tax-free assets creates the freedom to act without triggering unintended tax costs.
Beyond Federal Income Tax: The Hidden Marginal Rate for High Earners
Many assume Roth conversions are solely a question of today’s federal income tax bracket versus tomorrow’s. For high earners, the calculation is more nuanced.
Converting today may help avoid additional tax layers triggered by pre-tax withdrawals in the future, including:
1. Net Investment Income Tax (NIIT)
The 3.8 percent NIIT applies when modified adjusted gross income surpasses certain thresholds ($200,000 single / $250,000 married filing jointly). Traditional IRA withdrawals can push you into NIIT territory and cause investment returns in taxable accounts to be taxed at this additional rate.
2. Medicare IRMAA Surcharges
Medicare premiums rise sharply if Modified Adjusted Gross Income (MAGI) exceeds specific levels. Roth withdrawals do not count toward MAGI, while traditional IRA withdrawals do. Reducing future pre-tax balances through conversions can mitigate costly IRMAA surcharges.
3. Capital Gain Stacking
Pre-tax withdrawals can force long-term capital gains into higher tax brackets, converting what could have been 15 percent gains into 18.8 percent or even 23.8 percent gains (once NIIT applies).
4. Loss of Deductions and Credits
For high-income households, withdrawals from traditional accounts can trigger phaseouts and lost tax benefits such as:
• Qualified business income deduction limitations
• Child tax credit phaseouts
• Passive loss limitations
• State tax benefit limitations
The importance of these lost deductions and credits is usually vastly understated. Remember that a marginal tax rate is the tax rate that you would pay on the next dollar you earn. Another way to think about it is the effect of the next dollar you earn on your tax bill and therefore on the amount you get to keep.
Here’s a real-life example of this effect. With the passage of the OBBBA this summer, the cap on the deduction for state and local taxes (SALT) has been increased from $10,000 to $40,000. However, this increased deduction is phased out for those at higher income levels. The cap on the SALT deduction phases down from $40,000 to $10,000 over the $500,000 to $600,000 income range. If your Modified Adjusted Gross Income as a married filing jointly couple is $499,000, your marginal tax rate is likely 32% and you’re able to deduct up to $40,000 in state and local taxes if you’re itemizing. But, if your income is $500,001, then you have entered the phaseout range for the expanded SALT deduction cap. Each additional dollar you earn in this phaseout range is not only an additional dollar in your taxable income; it’s also an additional amount of your state and local taxes that you now can’t deduct. In other words, each dollar you earn in this range has a multiplied effect on your taxes.
The real marginal tax rate for high earners often exceeds the number on the tax bracket chart once these effects are included. Roth conversions can reduce the likelihood of crossing these thresholds in retirement because you can choose to take some of your required income from a Roth account – which doesn’t affect these phaseouts.
Debunking a Common Myth: The “Lost Growth” Argument
Some investors hesitate to convert because they believe they will lose the investment growth they could have earned on the dollars used to pay the tax. Ed Slott, one of the nation’s foremost retirement tax experts, has clearly addressed this misconception:
“Comparing growth inside a Roth to growth on dollars used to pay the tax is comparing different pools of money and different tax treatments. The Roth money wins because it grows tax-free forever.”
Paying taxes from outside funds amplifies the benefit: the converted principal compounds tax-free, while the tax paid is no longer part of your estate subject to future taxation. And, the growth on the amount that was used to pay the tax would ultimately have been taxable anyway.
Strategic Conversion Timing
Roth conversions do not need to be all-or-nothing. High-income households can stage conversions to maximize efficiency, including:
• Filling up lower tax brackets intentionally
• Timing conversions in lower-income years (e.g., early retirement)
• Coordinating conversions with charitable planning
• Managing income to avoid IRMAA brackets
Tax planning is not a one-time event. It is an annual evaluation designed to optimize the amount of income you get keep and use for your goals over your lifetime.
Legacy Planning Advantages
Under current law, most non-spouse beneficiaries must withdraw inherited IRA balances within 10 years, often during their peak earning years. Roth IRAs still require distributions, but those distributions are tax-free.
For families where beneficiaries are also high earners, Roth assets significantly improve the after-tax value of inherited wealth.
The Case for Acting in Today’s Tax Environment
Current tax rates are historically low, and many provisions from the Tax Cuts and Jobs Act are scheduled to sunset in the coming years. Whether or not legislation changes again, today’s environment presents a compelling opportunity to evaluate conversions as part of a broader wealth and tax strategy.
Final Thoughts
Roth conversions are not simply a tax tactic. They are a long-term planning strategy that creates control, flexibility, and certainty.
For high-income households, they offer:
• Reduced lifetime tax exposure
• Protection from future tax-rate increases
• Lower Medicare and surtax risk
• Enhanced legacy planning
• Greater spending freedom in retirement
Every situation is unique. With the right analysis, Roth conversions can become one of the most effective tools in a high-earner’s financial plan.
If you’re considering whether a strategic Roth conversion schedule makes sense for your household, it would be my pleasure to help you evaluate the opportunity and build a thoughtful multi-year plan that maximizes long-term benefit.
This content is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.