A Roth conversion makes mathematical sense for high-income earners when their future marginal tax rate is expected to be equal to or higher than their current rate — but the timing, amount, and structure of the conversion require careful, individualized analysis.

Why It Matters

For business owners, executives, and families with substantial retirement assets, the question of whether to convert pre-tax retirement funds into a Roth IRA (an individual retirement account funded with after-tax dollars, from which qualified withdrawals are tax-free subject to some conditions) is one of the more consequential long-term planning decisions available. Unlike many financial strategies, a Roth conversion is largely irreversible once executed, and its benefits — or costs — compound over decades.

High-income earners are often told that Roth accounts are simply not available to them, which is partially true for direct contributions. However, Roth conversions operate under a separate set of rules, making them accessible regardless of income level. Understanding when the math genuinely favors conversion — rather than assuming it always does — is where prudent planning begins.

What to Know

A Roth conversion involves moving funds from a traditional IRA or employer-sponsored retirement plan — accounts funded with pre-tax dollars — into a Roth IRA. The converted amount is recognized as ordinary income in the year of conversion and taxed accordingly. This is the central trade-off: paying taxes today in exchange for tax-free growth and tax-free withdrawals in retirement.

For high-income earners, the analysis hinges on several interconnected variables. Current marginal tax rates, projected future income, required minimum distributions (RMDs — mandatory annual withdrawals that begin at age 73 under current law for most retirement accounts), estate planning objectives, and state income tax treatment all factor into whether conversion generates a net benefit over time. In States without income tax, such as Tennessee and Florida, the equation often shifts — since there is no state-level offset to the federal tax cost of conversion, the decision becomes almost entirely a federal calculation.

Key Considerations

One of the most frequently overlooked aspects of Roth conversions is the opportunity created during income transition years — periods when a business owner has sold a company, taken a sabbatical, or moved between employment situations. During these windows, taxable income may temporarily decline, creating an environment where conversion at lower marginal rates becomes structurally advantageous.

Equally important is the concept of tax bracket management. Rather than converting an entire account at once, many families and their advisors consider partial conversions executed over multiple years — filling up lower tax brackets methodically without triggering unnecessarily elevated marginal rates. This approach also requires attention to the impact on Medicare premium surcharges, known as IRMAA (Income-Related Monthly Adjustment Amount), which increase Medicare Part B and D costs for higher-income individuals based on modified adjusted gross income from two years prior.

Estate planning dynamics add another layer. Roth IRAs are not subject to RMDs during the original owner's lifetime, which means assets can remain invested and compounding tax-free for a longer period. For families with generational wealth objectives, this characteristic can be meaningful — particularly when combined with favorable state-level tax environments in Tennessee or Florida.

How Families Typically Approach This

Discerning families who engage in this type of planning typically begin with a multi-year tax projection — a forward-looking model that estimates income, deductions, and marginal rates across a defined planning horizon. This projection forms the foundation against which conversion scenarios are stress-tested. The analysis is rarely a single-year exercise; it reflects how today's decision interacts with retirement income, Social Security claiming strategy, and eventual estate distribution.

Collaboration between a fiduciary (a legal standard requiring the advisor to act in the client's best interest at all times) investment advisor and a qualified tax professional is generally central to this process. The investment advisor manages the portfolio implications — including what assets to hold in each account type for tax-efficiency — while the CPA or tax attorney handles the income recognition and filing strategy. As described on the firm's services page, integrated planning that connects portfolio management with broader wealth stewardship considerations is the framework within which these decisions are most effectively made.

Frequently Asked Questions

Can high-income earners contribute directly to a Roth IRA?

Direct Roth IRA contributions are subject to income phase-out limits set annually by the IRS. For 2024, the ability to contribute directly begins phasing out at $146,000 for single filers and $230,000 for married couples filing jointly. However, high-income earners may still access Roth accounts through a strategy commonly called a backdoor Roth — involving a non-deductible traditional IRA contribution followed by a conversion — though this approach involves its own tax considerations, particularly around the pro-rata rule, which requires careful analysis when other pre-tax IRA funds exist.

How does a Roth conversion affect Medicare costs?

Because Roth conversion income is added to modified adjusted gross income in the year of conversion, it can trigger IRMAA surcharges — income-based increases to Medicare Part B and Part D premiums — if income crosses certain thresholds. These surcharges apply two years after the relevant income year, meaning a conversion in 2024 could affect Medicare costs in 2026. For individuals near or in Medicare eligibility, this is a meaningful cost to model before executing any conversion strategy.

What happens to Roth IRA assets when passed to heirs?

Under current law following the SECURE Act 2.0, most non-spouse beneficiaries who inherit a Roth IRA are required to fully distribute the account within ten years of the original owner's death. However, unlike inherited traditional IRAs, qualified distributions from an inherited Roth IRA remain income tax-free to the beneficiary — provided the account was held for at least five years. This makes Roth assets particularly valuable from a generational transfer perspective, as heirs receive tax-free income rather than a taxable distribution.

Is there a limit on how much can be converted in a given year?

There is no statutory cap on the dollar amount that can be converted from a traditional IRA or pre-tax retirement account to a Roth IRA in any given year. However, the full converted amount is recognized as ordinary income, meaning large conversions can push income into significantly higher federal tax brackets and trigger or amplify IRMAA surcharges. For this reason, most considered conversion strategies involve staged, multi-year conversions calibrated to remain within targeted tax brackets rather than maximizing conversion volume in a single year.

Does relocating to Tennessee or Florida change the Roth conversion calculus?

Relocating to a state without a personal income tax — such as Tennessee or Florida — does affect the long-term analysis in a nuanced way. In states with income tax, part of the cost of conversion is offset by the fact that future Roth withdrawals avoid both federal and state income tax. In states without income tax, future traditional IRA withdrawals would only be subject to federal tax, narrowing the comparative advantage of paying federal taxes today through a Roth conversion. That said, other factors — including RMD management, estate planning, and federal rate expectations — may still favor conversion, and each situation requires its own modeled analysis rather than a generalized conclusion.

This article is for educational purposes only and does not constitute investment, tax, or legal advice. Skela Financial, LLC is a registered investment advisor in the states of Tennessee and Florida. Individual circumstances vary and require personalized analysis before any financial decision is made.

Skela Financial is a registered investment advisor based in Tennessee and Florida, providing portfolio management, wealth stewardship, and bespoke financial planning to business owners, families, and individuals nationwide.