Roth Conversion Ladders When Equity Distorts Your Income

A Roth conversion takes dollars from a traditional IRA or traditional 401(k), moves them to a Roth account, and triggers ordinary income tax on the converted amount. The traditional bucket shrinks; the Roth bucket grows, along with future tax-free growth and withdrawals, plus freedom from required minimum distributions. The move is a tax-rate arbitrage: pay tax now at a known rate, avoid tax later at an unknown rate that for high-asset retirees is usually higher.

For tech employees whose income spikes and dips unpredictably (large RSU vest years followed by sabbaticals, IPO years followed by post-IPO burn-out years, early retirements before Social Security claiming), the conversion window matters. A year with $80k of income is a year where a $200k conversion fills up the 22% and 24% brackets and stops before 32%. A year with $600k of income is a year where any conversion is taxed at 32-37%. The difference is 10-15 percentage points on the converted amount, which on a full $2M traditional IRA over several years can equal $300-400k of saved lifetime tax.

This guide covers the conversion mechanics, the specific bracket planning math, how equity comp distorts the windows, and the five-year rule that governs when converted dollars can be withdrawn.

How Roth conversions work

A conversion is a distribution from a traditional account (IRA or 401(k)) followed immediately by a contribution to a Roth IRA. The distributed amount is added to your ordinary income on Form 1040, and you owe tax on it at your marginal bracket. The Roth account receives the gross (pre-tax) amount as a basis contribution.

Example. You have $500k in a traditional IRA. You convert $100k to Roth. Your taxable income increases by $100k. If you are in the 24% bracket, federal tax increases by $24k. State tax adds on. Your traditional IRA drops to $400k. Your Roth IRA increases by $100k.

Future growth in the Roth is tax-free. Withdrawals from the Roth after age 59.5 and five years from the first Roth contribution are tax-free. There are no RMDs on Roth IRAs during the owner’s lifetime (RMDs do apply to Roth 401(k)s until the owner can roll to Roth IRA).

Converted dollars have their own five-year clock. Each conversion starts a separate five-year clock for withdrawal of that specific conversion amount without the 10% early-withdrawal penalty. This only matters for conversions done before age 59.5.

The bracket-filling math

Current federal ordinary-income brackets for 2025 (single filer):

Bracket	Range (taxable income)
10%	$0 - $11,925
12%	$11,925 - $48,475
22%	$48,475 - $103,350
24%	$103,350 - $197,300
32%	$197,300 - $250,525
35%	$250,525 - $626,350
37%	$626,350+

The conversion planning rule is: in a low-income year, convert enough to fill up the bracket you are willing to pay, then stop. For a single filer with $30k of dividends and interest as their only income, filling up the 22% bracket ($103,350 - $30k = $73,350 of conversion) costs $22% × $73,350 = $16,137 in federal tax. The next dollar converted would be at 24%.

A common strategy is “convert to the top of the 24% bracket” for retirees in their 60s who expect to be in the 32-35% bracket during RMD years. Paying 24% now to avoid 32-35% later is a 8-11 point arbitrage on every converted dollar.

For a specific tech worker:

• High-income working year ($500k total comp): marginal bracket 35%. Bad year for conversions.
• Gap year ($50k from freelance, dividends): marginal bracket 22%. Good year, convert to top of 24% ($197k).
• Early retirement year, age 62, pre-Social Security ($40k of dividends): marginal bracket 12%. Excellent year, convert to top of 24% ($197k).

How equity comp distorts the windows

RSU vests, ISO exercises, and acquisition income all count as ordinary income in the year recognized. This pushes the tech employee into high brackets in years with liquidity events.

In a typical senior-engineer career:

• Years with normal base + RSU vests: marginal bracket 32-35%, not good for conversions.
• IPO year with double-trigger RSU settlement: marginal bracket 37%, worst year for conversions.
• Post-IPO year with stabilized comp: marginal bracket 35%, still bad.
• Sabbatical year or role gap: marginal bracket 22-24%, good for conversions.
• Early retirement before Social Security: marginal bracket 12-24%, excellent for conversions.
• Social Security age plus RMDs: marginal bracket rises with forced distributions, 32-35% common.

The window between “end of active equity-comp career” and “start of Social Security and RMDs” is 5-10 years long for most retirees who leave tech at 55-62. That window is the prime conversion period.

For someone retiring at 58 with $3M of traditional IRA assets, the window to RMD (age 73 under current law) is 15 years. Converting $150k per year fills up the 24% bracket and over 15 years converts $2.25M of the traditional balance, leaving only $750k plus growth to face RMDs. That reduces RMD-era bracket from 35% to 24%, saving roughly 11 percentage points on $2.25M, or $247k of tax.

The five-year rules (both of them)

There are two five-year rules for Roth accounts, commonly conflated.

Five-year rule #1 (tax-free qualified distributions): to withdraw any earnings from a Roth IRA tax-free, you must have had any Roth IRA open for at least five tax years, and you must be age 59.5 or meet another qualifying condition. This five-year clock starts with the first-ever Roth contribution or conversion and applies to all Roth IRAs collectively.

Five-year rule #2 (conversions and early withdrawal penalty): each Roth conversion has its own five-year clock. If you withdraw converted dollars before age 59.5 and before five years from that specific conversion, you owe the 10% early withdrawal penalty on the converted amount.

For a 45-year-old doing conversions, this matters. If you convert $100k this year and want to withdraw it at age 50, you need to wait until age 55 (five years from this conversion). Or you need to reach age 59.5 for the penalty to not apply regardless of conversion timing.

For a 62-year-old doing conversions, the five-year rule for the 10% penalty is moot because the filer is already past 59.5. The rule-1 clock still applies for tax-free earnings treatment, so having an older Roth IRA already established helps.

The Pro-Rata rule

If you have both pre-tax and after-tax dollars in any traditional IRA (including rollover IRAs), conversions pull proportionally from both. You cannot cherry-pick only the after-tax dollars for conversion.

Example. You have $100k in a traditional IRA, of which $20k is after-tax basis (from non-deductible contributions). You convert $50k. The conversion is proportional: $10k is return of after-tax basis (not taxable), $40k is pre-tax (fully taxable). You cannot convert $20k and claim it was all basis.

The pro-rata rule applies across all your traditional IRA accounts aggregated under IRC §408(d)(2). It does not apply to traditional 401(k) balances (those are tested separately within that 401(k)). Rolling a traditional IRA into a 401(k) can therefore “clean up” the pro-rata calculation if you have isolated after-tax basis you want to convert cleanly.

The backdoor Roth

For high earners above the Roth IRA contribution income limit ($165k single / $246k MFJ phase-out endpoints for 2025), the “backdoor Roth” strategy uses a non-deductible traditional IRA contribution followed by immediate conversion.

Mechanics: contribute $7,000 ($8,000 if over 50) to a non-deductible traditional IRA. No income-limit restriction on non-deductible contributions. Immediately convert the $7,000 to a Roth IRA. The conversion is taxable only on the earnings between contribution and conversion (usually zero if done within days).

The pro-rata rule is the killer for backdoor Roth: if you have pre-existing pre-tax traditional IRA balances, the contribution is treated as proportionally mixed with the existing pre-tax dollars. A clean backdoor Roth requires zero pre-tax traditional IRA balances across all accounts.

Many high-earning tech employees with rollover IRAs from old 401(k)s have a pro-rata problem. The fix is to roll the pre-tax balance back into a current 401(k) that accepts rollovers in, leaving the traditional IRA at zero, then executing the backdoor Roth.

Frequently asked

Can I undo a conversion if it turns out to be a mistake? No. The Tax Cuts and Jobs Act of 2017 eliminated recharacterization of Roth conversions. Once converted, the conversion is permanent. Plan carefully before executing.

How much should I convert each year? Depends on your bracket and goals. A common framework: convert to the top of the bracket you expect to be in during retirement, no more. Converting into higher brackets than retirement projections is rarely arbitrage-positive.

Does the converted amount affect Medicare premiums (IRMAA)? Yes. Medicare Parts B and D premiums are income-based starting at $106k single / $212k joint MAGI (2025 thresholds). A conversion in a retirement year can push MAGI high enough to trigger IRMAA surcharges two years later (the IRMAA look-back is 2 years). Factor this into the conversion size decision.

Is there an income limit on doing conversions? No. Conversions have no income limit. Only direct Roth IRA contributions have an income limit. This is why the backdoor Roth works.

Can I convert from a 401(k) directly? Yes, if the plan allows “in-service” conversions or rollovers. Many 401(k) plans allow Roth 401(k) conversion inside the plan, or rollover to a Roth IRA after separation. Check the specific plan document.

Next step

If you are in a low-income year or approaching one (career transition, sabbatical, pre-Social Security retirement), model the conversion opportunity before December 31. The Roth conversion calculator estimates after-tax wealth differences across conversion amounts and scenarios. For conversions above $200k per year, coordinate with a CPA to ensure the withholding, state tax, and IRMAA implications are all considered before executing.