Roth Conversion Strategy After a Windfall

Why a windfall changes the Roth conversion math

A Roth conversion is simple in mechanics: you move money from a pre-tax account (traditional IRA, 401(k), rollover IRA) to a Roth IRA and pay ordinary income tax on the converted amount in that tax year. Since 2010, there is no income limit on Roth conversions — anyone can convert regardless of income.¹

The question is never can you convert — it's whether converting now is better than converting later, or not converting at all. That math depends almost entirely on your tax rate today versus your expected tax rate in the future. A windfall can move that rate by 10–20 percentage points in a single year, which completely changes the calculation.

When a windfall opens a Roth conversion window

Some windfalls generate no taxable income at all. When that is the case, the windfall year itself may be one of your lowest-income years — and potentially the best time in years to convert pre-tax retirement balances.

Life insurance death benefit

Death benefits paid under a life insurance policy are excluded from gross income under IRC §101(a).² A surviving spouse who receives a $2M death benefit pays no income tax on those proceeds. If the household drops from two earners to one after the loss, the windfall year may have the lowest MAGI in a decade. That creates a window: you can convert traditional IRA or rollover IRA balances at the surviving spouse's newly reduced income level, filling lower brackets before RMDs force distributions at higher rates in retirement.

Inherited assets with a step-up in basis

When someone inherits a brokerage account, real estate, or other appreciated assets, the cost basis is stepped up to the fair market value at the date of the decedent's death under IRC §1014.³ That step-up eliminates all unrealized capital gains — but it generates no taxable income at the time of inheritance. The year you receive the inheritance, your MAGI may be lower than it would otherwise be (especially if you reduced work to manage the estate). That is often a good conversion year.

Note: an inherited IRA is different. Traditional inherited IRA balances retain their pre-tax character — every dollar distributed is ordinary income. Non-spouse beneficiaries subject to the 10-year rule must deplete the account within 10 years and likely take annual distributions when the decedent was already past the required beginning date (per T.D. 10001). That forced income stream may actually close the Roth window in the inheritance years — see the section below.

Gifts, trust principal distributions, and tax-free settlements

Cash gifts are not income to the recipient under IRC §102. If a parent transfers $1M to a child, the child owes no income tax on receipt. Similarly, principal distributions from a trust are not taxable income to the beneficiary (only distributable net income flows through). Physical injury settlement proceeds excluded under IRC §104(a) also generate no income. In any of these situations, you may have a year where windfall cash arrives without any corresponding taxable event — creating a clean conversion opportunity.

What to do in a low-income windfall year

If your windfall is tax-free and your income is lower than usual, model how much traditional IRA / 401(k) balance you can convert while staying within a target bracket. Common strategies:

• Fill up to the top of the 22% bracket. For 2026, that means converting up to $103,350 in total taxable income for single filers, or $206,700 for married filing jointly, at a maximum marginal rate of 22%.
• Stop below the IRMAA trigger. If you are on Medicare (or within two years of it), keep MAGI below $109,000 single / $218,000 MFJ to avoid the 2026 IRMAA first-tier surcharge. Each dollar of Roth conversion above that line triggers a Medicare premium increase two years out.
• Coordinate with a CPA before December 31. Roth conversions must be completed in the tax year. You cannot do a 2026 conversion after the calendar year closes.

When a windfall closes the Roth conversion window

High-income windfalls — business sales, large RSU vesting events, taxable legal settlements, lottery winnings, large deferred compensation payouts — spike your MAGI in the year of receipt. Adding a Roth conversion on top of already-elevated income pushes the conversion dollars into the highest brackets: 35% ($250,526–$640,600 for single filers) or 37% (above $640,600).

Converting at 37% makes sense only in very specific circumstances: if you are highly confident future tax rates will be higher, if your heirs will inherit the account and face a 10-year forced distribution window at peak-income ages, or if a massive RMD burden would otherwise push you into permanent 37% territory in retirement. For most windfall recipients, the right call in a $2M income year is simply: do not convert this year.

The post-windfall planning window: years 2–5

For recipients of high-income windfalls — business sellers, executives with large equity payouts, retirees living off windfall capital — the most useful Roth conversion window often opens one to three years after the event. Once the spike-year income normalizes, you may find yourself in a structural low-income period:

• You are no longer receiving salary or W-2 income
• You are drawing from taxable accounts (which generate only modest investment income) rather than pre-tax retirement accounts
• Social Security has not started yet
• RMDs have not begun (required beginning date is April 1 following the year you turn 73 or 75)

This gap — often called the "retirement income valley" — is typically the optimal Roth conversion period. Bracket headroom may be significant, and each dollar you convert now is a dollar that never generates a future RMD, reducing your lifetime Medicare premium exposure.

Illustrative example: business sale, year 3

A married couple sold their business in 2026 for $5M in net proceeds. Year of sale MAGI: $3.2M. By 2029 (year 3), they are living off taxable account interest and dividends: roughly $120K MAGI from investments, no salary, Social Security still three years away.

Their 2026 ordinary income brackets for married filing jointly: the 24% bracket tops out at $394,600. With $120K of existing income, they have $394,600 − $120,000 = $274,600 of headroom before hitting the 32% bracket. Converting $200,000 from a rollover IRA keeps them in the 24% bracket. Over five years at that pace, they could convert $1M at 24% rates rather than leaving it to generate RMDs at potentially higher future rates.

2026 ordinary income tax brackets

These brackets determine what rate you pay on Roth conversion dollars, stacked on top of your other ordinary income. Source: IRS Rev. Proc. 2025-32.⁴

IRMAA and the long-term case for Roth conversion

Medicare Part B and Part D premiums are based on your MAGI from two years prior (the "IRMAA lookback").⁵ In 2026, the first IRMAA surcharge tier begins at $109,000 MAGI for single filers and $218,000 for married filing jointly. Above that threshold, you pay a surcharge on top of the standard $202.90/month Part B premium — surcharges range from roughly $81 to $487 per person per month depending on which tier you fall into.

The long-term Roth conversion argument goes like this: a large traditional IRA or 401(k) generates mandatory RMDs once you reach the required beginning date (age 73 for those born 1951–1959; age 75 for those born in 1960 or later).⁶ A $2M IRA at age 75 generates an initial RMD of roughly $87,000 per year (using the Uniform Lifetime Table divisor of 22.9). Stack that on Social Security and investment income, and many windfall recipients find themselves permanently above the IRMAA threshold — paying $2,000–$10,000+ per year per person in Medicare surcharges that could have been reduced through systematic pre-RMD conversions.

Roth IRAs and Roth 401(k)s have no required minimum distributions during the account owner's lifetime.¹ Each dollar converted before the RMD clock starts is a dollar that never forces income into a high-cost Medicare tier.

How to size a conversion each year

Most advisors use one or both of these sizing approaches:

Fill-the-bracket approach

Determine how much ordinary income you already have for the year (interest, dividends, Social Security, part-time work). Subtract that from the top of your target bracket. Convert that difference from traditional to Roth. Example: you have $90K of other income, target is the top of the 22% bracket ($103,350 for a single filer). Convert $13,350 — you fill the bracket without crossing into 24%.

IRMAA-safe approach

If you are on Medicare or approaching it, set a hard ceiling at the IRMAA tier you want to stay below. The first tier triggers at $109,000 (single) / $218,000 (MFJ). If your non-conversion income is $80,000 (single), your IRMAA-safe conversion cap is $29,000 for the year. Some advisors accept tier 1 as the ceiling and avoid tier 2, given the larger jump at $137,000 / $274,000.

Combining both approaches

If you are below Medicare age and more than two years from the required beginning date, IRMAA does not yet constrain your current year (though conversions done this year affect IRMAA two years from now). In those years, the fill-the-bracket approach is cleaner: convert up to the top of the 24% bracket each year and revisit the strategy annually as your income picture changes.

When not to convert

• You need the pre-tax funds within 5 years. Roth conversions must season for 5 years before converted amounts can be withdrawn penalty-free (for those under 59½). If you expect to need the capital, converting and then taking a distribution within the 5-year window creates a penalty problem.
• Your marginal rate today is higher than your expected future rate. If you are in the 37% bracket during the windfall year and expect to be in 22% during retirement, converting at 37% is a bad trade.
• Your heirs are in low brackets and will inherit a traditional IRA. A child who will distribute the inherited IRA during low-income years (early career, part-time work) may pay less in taxes than you would by converting now at higher rates. This is a planning conversation, not a rule — SECURE 2.0's 10-year rule compresses that distribution window significantly.
• You have not paid estimated taxes and have a large liability due. Converting creates additional income and a larger tax bill. If your estimated payments are behind, a year-end conversion could worsen your underpayment penalty. Confirm with your CPA in Q4 before proceeding.

What this looks like with an advisor

Roth conversion planning after a windfall is not a one-time calculation — it is an annual decision made in the context of your overall plan. A fee-only advisor typically models:

• Current-year income forecast (completed in Q3 or early Q4)
• Tax bracket headroom calculation at current income rates and expected future rates
• IRMAA tier exposure — current year and two years out
• RMD projections beginning at the required beginning date under current account balances and expected investment returns
• Lifetime tax comparison: convert at current rate vs. distribute at projected future rate, including IRMAA costs
• Estate and beneficiary considerations: Roth assets pass income-tax-free to heirs with no RMDs during the original owner's lifetime

For windfall recipients with $1M+ in traditional retirement accounts, this analysis typically runs annually for five to fifteen years. The aggregate tax savings — measured across conversions, IRMAA avoidance, and estate transfer — often exceeds the advisory fee by a large margin. See how to find a sudden wealth advisor for what to look for in a fee-only advisor who can run this analysis.

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