How Much Could A 64-year-old Couple With $2.4 Million In An Ira Save By Converting Before Rmds Start?

The post How Much Could a 64-Year-Old Couple With $2.4 Million in an IRA Save by Converting Before RMDs Start? appeared first on 24/7 Wall St..

A 64-year-old couple with $2.4 million in retirement savings has a planning window with a fixed end date. Until required minimum distributions (RMDs) begin, they decide how much taxable income to report each year. Once RMDs begin, federal rules set a minimum withdrawal every year. Partial Roth conversions are how a couple uses that window. The worked example below shows that filling the lower brackets now can save five figures a year, but only under certain conditions.

When RMDs Start for Today’s 64-Year-Olds

Under 26 U.S.C. § 401(a)(9)(C)(v)(II), anyone who attains age 74 after Dec. 31, 2032 has an applicable RMD age of 75. Our couple turns 74 in 2036, so their RMDs start in 2037. That gives them every year through 2036 to convert. Once an RMD year arrives, the RMD has to come out first. Under Treas. Reg. 1.408A-4, A-6, the first dollars distributed are treated as the RMD, and an RMD cannot be converted.

How the IRS Taxes a Conversion

Under IRC § 408A(d)(3)(A)(i), the converted amount counts as gross income. Under § 408A(d)(3)(A)(ii), the 10% early-distribution tax does not apply. The income is taxed in the year the money leaves the original account (Treas. Reg. 1.408A-4, A-7), so December 31 is the deadline.

If either spouse has nondeductible basis, § 408(d)(2)(A) treats all of that person’s IRAs as one contract, which is the pro-rata rule reported on Form 8606. A conversion also cannot be undone. Under § 408A(d)(6)(B)(iii), recharacterization is not available for conversions.

Worked Example: Filling the 22% Bracket for 2026

Consider a sample couple. Both spouses are 64, they hold $2.4 million in IRAs, they have $60,000 of other ordinary income from a pension and interest, and neither has claimed Social Security yet. Their target for 2026 is adjusted gross income of $218,000, which is the top of the lowest Medicare premium level.

1. Conversion amount: $218,000 minus $60,000 = $158,000.
2. Taxable income before the conversion: $60,000 minus $32,200 = $27,800. The 2026 joint standard deduction is $32,200.
3. Taxable income after the conversion: $218,000 minus $32,200 = $185,800. That stays below the $211,400 level where the 2026 joint 24% bracket begins.
4. Portion taxed at 12%: ($100,800 minus $27,800) x 12% = $8,760.
5. Portion taxed at 22%: ($185,800 minus $100,800) x 22% = $18,700.
6. Federal tax on the conversion: $8,760 + $18,700 = $27,460. That is an average rate of about 17.4%.

The bracket thresholds rise for 2027. The joint standard deduction is $33,200, and the 24% bracket starts above $218,250 of taxable income, so the same strategy has slightly more room next year.

How Much the Couple Could Save

Say the same $158,000 would otherwise come out later as RMDs taxed at 24%. That tax would be $37,920, so converting now saves $10,460 for each year the couple converts. A 24% future rate is a realistic assumption. Even with zero growth, the first RMD would be $2.4 million divided by 24.6 = about $97,561, using the IRS Uniform Lifetime Table distribution period of 24.6 at age 75. If the IRA grew for 10 years at the current 4.88% 10-year Treasury yield, the balance would reach about $3,864,898. The first RMD would then be about $157,110, before adding the pension and Social Security. Roth IRAs, by contrast, have no required distributions during the owner’s lifetime.

The math reverses if their future rate falls to 22% or lower. Every dollar converted today then costs more tax than it saves.

How Conversions Can Raise Medicare Premiums (IRMAA)

Medicare sets premiums using a two-year lookback at income, so 2026 conversion income will set this couple’s premiums in 2028. On the 2026 schedule, joint income up to $218,000 means the standard $202.90 monthly Part B premium. Income above that raises Part B to $284.10 and adds a $14.50 Part D surcharge, and each spouse pays them. Income over $410,000 raises Part B to $649.20. The thresholds for later years have not been published yet. Conversion income also counts for all purposes, including the taxation of those monthly federal retirement payments. A 64-year-old on marketplace health insurance can also lose ACA premium tax credits.

Paying the Tax From Outside Funds

If the $27,460 is withheld from the conversion, the Roth IRA gets that much less, and it loses the tax-free growth on that money every year after. Paying from a taxable account moves the full $158,000 into the Roth. This is the main factor on how much the strategy pays off. A couple without cash on hand gives up much of the benefit.

Who Conversions Don’t Suit

• Couples who would have to use IRA money to pay the conversion tax.
• Households that expect to land in a smaller bracket after RMDs begin.
• Anyone who will need the converted money within five years, because Roth five-year rules apply.
• Pre-Medicare retirees who rely on ACA premium credits.
• People moving soon from a high-tax state to a state without an income tax.
• Owners who plan to leave the IRA to charity.

A Decision Framework

Four questions decide whether converting makes sense. First, is today’s marginal rate lower than the expected rate once RMDs begin? Second, can the tax be paid from other funds? Third, does the conversion push income past an IRMAA threshold two years from now?

Fourth, will the money stay in the Roth long enough to grow tax-free? If all four answers favor converting, filling the 12% and 22% brackets each year through 2036 can add up to six-figure savings over the full window (we sized up that pre-RMD window in detail in a free Roth conversion guide). If even one answer doesn’t, a smaller conversion, or none, is the better choice. The next figures to watch are the 2027 IRMAA thresholds, which will be published after the 2027 brackets the IRS released this month.

The post How Much Could a 64-Year-Old Couple With $2.4 Million in an IRA Save by Converting Before RMDs Start? appeared first on 24/7 Wall St..