A Skipped Roth Conversion Before 73 Carries a $3,500 Tab
Retirees who leave the years between their last paycheck and age 73 untouched pay for it later: about $3,500 in extra tax per skipped year on an average $167,970 balance.
Each year a retiree passes on a Roth conversion during the gap years before required minimum distributions begin at 73 costs roughly $3,500 in additional tax later, based on the average retirement account balance of $167,970, according to an analysis published by 24/7 Wall St.
There is a stretch of years in most retirements when taxable income falls to its lowest point of an adult lifetime. The paychecks have stopped. Social Security may not have started. Required minimum distributions — the withdrawals the IRS forces out of traditional retirement accounts — do not begin until age 73. For that window, a retiree with a large pretax balance is, on paper, a low-income taxpayer.
An analysis published by 24/7 Wall St puts a number on what happens if that window goes unused. Each year a retiree skips a Roth conversion during the gap years costs roughly $3,500 in extra tax later, measured against the average retirement account balance of $167,970.
What the gap years actually are
The term describes the interval between a retiree's final wage income and the first mandatory withdrawal from a traditional IRA or 401(k). Money in those accounts has never been taxed. It gets taxed on the way out, at ordinary income rates, and once RMDs begin at 73 the timing is no longer the retiree's decision — the IRS sets the minimum amount and the calendar.
A Roth conversion moves money from the pretax account into a Roth account. The retiree pays income tax on the converted amount in the year of the conversion. After that, the money grows and comes out tax-free, and it is not subject to required minimum distributions. The whole strategy is a trade: pay tax now at a rate you choose, or pay it later at a rate the tax code chooses for you.
The reason gap years matter is that this is the cheapest tax rate a retiree is likely to see. With little or no wage income, the lower brackets sit empty. A conversion fills them. Do nothing, and those low brackets expire unused at the end of each December — they do not roll forward.
Where the $3,500 comes from
The figure is not a penalty and it does not appear on any notice. It is the difference between two paths for the same dollars: converted early at a low marginal rate, or left in place to compound and then be pulled out later, on top of Social Security and any other income, at a higher marginal rate. The gap between those two rates, applied to the amount that could reasonably have been converted in one gap year on a $167,970 balance, is the roughly $3,500 of extra lifetime tax.
Two things drive it. The first is bracket arbitrage. The second is compounding on the wrong side of the ledger. A pretax balance that keeps growing does not just get bigger — the government's share of it gets bigger in absolute terms too, and the RMD formula pulls out a rising percentage as the account holder ages.
Some illustrative arithmetic on the reported figures, not a reported result: a retiree who leaves the entire decade from 63 to 73 alone, at about $3,500 of forgone benefit per year, is looking at something on the order of $35,000 in additional lifetime tax. The $3,500 is also roughly 2.1% of the $167,970 average balance — which is a useful way to hold the idea, because it means the cost of inaction scales with the size of the account rather than staying fixed.
How it scales with the balance
The $167,970 figure is an average, and averages hide the two cases that matter most. On a balance of roughly $83,985 — half the average — a single skipped year is a much smaller number, and the retiree may well be better off simply taking the RMDs and not paying tax early on money they will need to spend anyway. On roughly $335,940 — double the average — the same skipped year is worth about twice as much, and the account is large enough that RMDs later in retirement can push a taxpayer into a bracket they never occupied while working. Those figures are straight multiples of the reported average, offered to show the shape of the curve rather than as findings.
This is why the strategy is not universal advice. Conversion makes sense when a retiree's marginal rate today is lower than the rate they expect to face at 73 and beyond. It makes less sense, or none, when the reverse is true, when the tax on the conversion has to be paid out of the retirement account itself, or when the extra income knocks a household into higher Medicare premium territory or affects the taxation of Social Security benefits. Those interaction effects are the reason the calculation belongs in a spreadsheet with the household's actual numbers, not in a rule of thumb.
The part investors control and the part they do not
The $167,970 figure is an average, and averages hide the two cases that matter most.
Retirement account balances move with the market, and the market has not been giving retirees a clean signal to work with. The S&P 500 tracker SPY closed at $769.35 on Aug. 28, down 0.23% on the day, with the Nasdaq 100 fund QQQ at $716.43, off 0.65%, and the Dow tracker DIA at $535.06, down 0.03%. Those are the most recent closes before the long weekend.
The relevance is not directional. It is that a conversion executed when balances are depressed moves more shares out of the taxable-later account for the same tax bill, while a conversion after a strong run costs more in tax for the same number of shares. Market timing is not a reliable tool, but the mechanics do run in that direction, and retirees who convert in tranches through the year rather than in one December decision get an average rather than a single guess.
What the retiree does control is the calendar. Age 73 is fixed in statute. The number of gap years available is set by when the paychecks stop and, in practice, by when Social Security begins — claiming early shortens the window by adding taxable income to it. Every December that passes without a decision closes one of those years permanently.
What to watch from here
Three things determine whether the $3,500-per-year estimate holds or grows. One is the trajectory of ordinary income tax rates, since the entire case for converting early rests on today's brackets being cheaper than tomorrow's. Two is the RMD age itself, which Congress has already moved once and could move again — a later start date lengthens the gap years and increases the amount at stake. Three is the retiree's own income mix: pensions, annuity payments and taxable brokerage income all crowd out the room a conversion would otherwise occupy.
For anyone in the window now, the practical step is narrow and dated. Establish the marginal rate for the current tax year, work out how much room is left before the next bracket, and decide before Dec. 31 how much of that room to use. Doing nothing is a decision. The IRS treats it as one, and prices it accordingly.
Frequently asked questions
What are retirement gap years?
Gap years are the stretch between a retiree's last paycheck and their first required minimum distribution, which begins at age 73. During that period taxable income is often at its lowest point in decades, because wages have stopped and mandatory withdrawals have not yet started, leaving the lower tax brackets partly or entirely unused.
How much does skipping a Roth conversion cost?
According to the 24/7 Wall St analysis, each gap year a retiree skips a Roth conversion costs roughly $3,500 in additional tax later, measured on the average retirement account balance of $167,970. The cost is not a penalty; it is the difference between paying tax now at a low chosen rate and paying it later at a higher forced rate.
What exactly is a Roth conversion?
A Roth conversion moves money from a traditional pretax IRA or 401(k) into a Roth account. Income tax is due on the converted amount in the year of the conversion. After that, growth and withdrawals are tax-free and the money is not subject to required minimum distributions, removing those dollars from future forced taxable income.
Does converting make sense for everyone?
No. Conversion helps when a retiree's marginal tax rate today is lower than the rate they expect to face from age 73 onward. It works against them if the reverse is true, if the tax has to be paid out of the retirement account itself, or if the extra income raises Medicare premiums or the taxable share of Social Security benefits.
Why does the balance size matter so much?
The roughly $3,500 estimate is about 2.1% of the $167,970 average balance, so the cost of inaction scales with account size. On a much smaller balance the figure shrinks and taking ordinary required distributions may be simpler. On a much larger balance, later required withdrawals can push a household into a bracket it never occupied while working.
When does the decision have to be made?
Roth conversions are dated by tax year, so the room in a given year's lower brackets expires on Dec. 31 and does not carry forward. That makes the fourth quarter the natural point to measure the current marginal rate, calculate the remaining bracket space, and decide how much, if any, to convert before the calendar closes.
Sources
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