Thinking about retiring soon? A Roth IRA conversion might be a smart strategy to minimize your tax burden in the future.

Here’s the deal: By converting your existing pretax or nondeductible IRA funds into a Roth IRA, you’re essentially pre-paying taxes now. The upside? All that lovely growth within the Roth IRA becomes tax-free in retirement.

Of course, there’s a catch. You’ll owe taxes upfront on the amount you convert.

So, when’s the best time to convert?

• Early Retirement: Typically, your income dips after you retire. Converting during this lower-earning period reduces your immediate tax hit.
• Favorable Tax Brackets: Acting before the end of 2025 might be wise, as tax provisions from the past few years could change. Converting while you’re still in a lower tax bracket could save you money in the long run.

A word of caution: Be mindful of Medicare Part B and Part D premiums. These are based on your Modified Adjusted Gross Income (MAGI), which includes any converted IRA funds. There’s a two-year look-back, so a large conversion could inflate your IRMAA (Income-Related Monthly Adjustment Amount) and lead to higher premiums down the road.

For example, the standard Part B premium sits at $174.70 in 2024, but it jumps if your MAGI surpasses specific limits. Converting a significant sum from a pretax IRA could push you into a higher IRMAA bracket, resulting in pricier premiums.

The takeaway?

A Roth IRA conversion can be a great way to save on taxes during retirement, especially if done strategically during your lower-income years. However, keep the potential impact on your Medicare premiums in mind. Converting a smaller amount over time might be a better option to avoid bumping yourself into a higher IRMAA bracket.

Remember, consulting a financial advisor can help you determine if a Roth IRA conversion is the right move for your specific situation.