Roth conversion in 20s can pay off when income takes a dip

A Roth conversion in 20s or 30s is getting a fresh look from financial advisers, according to MarketWatch, as younger savers with unusually low income years may be able to move retirement money at a cheaper tax cost.

The move is usually discussed much later in life. MarketWatch columnist Beth Pinsker wrote that savers with large tax-deferred accounts often start worrying about required minimum distributions once retirement is close, because withdrawals from traditional retirement accounts can create a bigger tax bill.

MarketWatch gave one example: $1 million in tax-deferred money at age 60 could grow to $3 million by 75 if it is left untouched, and required withdrawals could start around $120,000 a year and rise from there.

Should I do a Roth conversion in my 20s or 30s?

A Roth conversion means taking money from a tax-deferred account, paying income tax on it now, and putting it into a Roth account where future growth can be tax-free. The strategy can make sense when a person’s income is temporarily low, because the tax owed on the conversion may be lower than it would be in peak earning years.

Certified financial planner Joon Um of Beverly Hills, California, told MarketWatch that he has seen clients start conversions in their 30s or 40s, usually because of a low-income year rather than their age.

Those openings can come from a layoff, time spent launching a business, a pause after selling a company, one spouse leaving work for child care, or a return to school, according to MarketWatch. A down stock market can add another advantage, because the converted assets may be valued lower before any rebound happens inside the Roth account.

MarketWatch reported several early examples. Sarasota, Florida, adviser Michael DeMassa helped his 20-year-old son convert a pretax 401(k) to a Roth IRA after the son went back to school. Augusta, Georgia, adviser Kelly Renner said the youngest conversion client at their firm was 22.

Jeff Judge of Forest Hills, Maryland, told MarketWatch he handled a conversion for a 27-year-old client who had left a corporate job to travel for a year and was in the 10% tax bracket. Judge said the client converted part of an old 401(k) rollover IRA and owed very little tax.

Why advisers say income matters more than age

MarketWatch noted that many people traditionally target the years after work ends and before required minimum distributions begin. RMDs start at 73, or 75 for people born after 1960.

There is another clock, too. Medicare premium surcharges known as IRMAA can begin once modified adjusted gross income passes certain levels. MarketWatch said the 2026 thresholds are $109,000 for single filers and $218,000 for couples.

That window may be tighter than many savers expect. MarketWatch cited Gallup data showing that most people now work past 60, and part-time work or investment income can keep tax rates from falling sharply in retirement.

Cash on hand is the catch

MarketWatch said Roth conversions tend to work best when the tax bill is paid from cash outside the retirement account. If $10,000 is converted in the 12% bracket, the tax bill would be $1,200; paying it from the converted money would leave only $8,800 going into the Roth.

Adviser Robert Persichitte told MarketWatch he used the strategy himself after starting his own firm in Colorado, when his income fell into the 12% bracket for several years. He said the tax payments made his bank balance shrink, even though the approach was the best use of his savings budget at the time.

Mike Casey, an adviser in Alexandria, Virginia, described a 44-year-old tech engineer who took a sabbatical with income near zero after using stock options to raise cash for the tax bill. Casey told MarketWatch the client converted about $180,000 from a traditional IRA while filling the 12% and 22% brackets.

James Malatos, an adviser in Atlanta, told MarketWatch that conversion chances are often brief and easy to miss. Rob Schultz of Encino, California, said a physician couple converted after residency before a medical mission abroad; 15 years later, he said, the account had grown significantly and their household income topped $500,000.

This story draws on original reporting from MarketWatch.