Roth Conversions Explained: How Minnesota Families Can Reduce Taxes and Grow Retirement Savings

You’ve worked hard and been a diligent saver over the last few decades. Hopefully, this means your retirement income plan looks better than ever, and you’re well on your way to a comfortable retirement. However, just because you stop getting a paycheck in retirement doesn’t mean you’ll stop paying taxes on your earnings. Depending on your income, the annual tax hit could leave a big dent in your plans.

We all know taxes are inevitable. But could it make sense to pay taxes on retirement savings sooner rather than later? If you want to reduce your lifetime liability, it’s time to consider Roth conversions as a tax planning strategy.

Below, we’ll explain how converting pre-tax retirement savings to a Roth IRA can create long-term tax advantages, particularly in retirement.

A Roth IRA conversion is the process of transferring retirement assets from a pre-tax retirement account, such as a traditional IRA, simplified employee pension (SEP), SIMPLE IRA, or 401(k), into a Roth IRA. You can do this all at once or in stages — though one strategy is usually better than the other. More on this below. 

Roth conversions, sometimes referred to as Roth rollovers, are generally considered a wise retirement planning strategy because they can reduce your tax liability once you stop working. While you have to pay income tax on the money you convert upfront, future withdrawals from the Roth account are tax-free — a phrase all current and future retirees generally like to hear when brainstorming ways to maximize their retirement savings. 

Anyone with a traditional IRA or other retirement account can perform a Roth IRA conversion. Even better, the process is pretty straightforward. Roth conversions can be done one of three ways:¹

• A 60-day rollover: You take a distribution from your retirement plan in the form of a check and deposit that money in a Roth account within 60 days. 
• A trustee-to-trustee transfer: You instruct the financial institution that holds your traditional IRA to transfer the money to your Roth account held with another institution.
• A same-trustee transfer: You tell the financial institution holding your traditional IRA to transfer the money into a Roth account with the same institution.

When you have a mix of taxable and tax-free retirement assets, you gain more control over your withdrawal strategy and tax liability. Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, making them an effective option for minimizing your future tax burden. 

How do Roth conversions fit into a broader retirement tax strategy? Let’s take a look at some key benefits. 

Converting assets to a Roth IRA reduces taxable income in retirement because all withdrawals are tax-free — welcome news for anyone who expects to be in a higher marginal tax bracket in retirement. During a conversion, you pay taxes on the converted amount now rather than on your earnings in retirement, which often leads to more savings down the line.

By comparison, money you keep in a traditional IRA or other pre-tax retirement account will be taxed upon withdrawal during retirement, including the money your investments earned. This could mean paying more taxes on a larger amount of money, because (hopefully) your earnings will have appreciated over time.

Roth IRAs have earned income limits that cap your annual contributions at $7,000 or $8,000 for those aged 50 and over. The income limits to contribute are $165,000 for single filers in 2025 and $246,000 for married filers.² Admittedly, these thresholds set by the IRS are a bit stringent, preventing many earners from contributing to a Roth IRA. This is where a Roth conversion can help.

Using what’s known as a backdoor Roth IRA strategy, you can get around the income limits for contributing to a Roth IRA and access its tax advantages. Here, you’d contribute to a traditional IRA, which has no income limits, and then move the money into a Roth IRA using a conversion.

Unlike traditional IRAs, Roth IRAs do not require you to take required minimum distributions (RMDs) when you reach age 73 (or 75 starting in 2033).³ This allows you to leave the money untouched and let it grow as long as you like, especially if other income is already taking care of your needs.

Beyond spousal benefits, a Roth IRA can be a valuable estate planning tool because your heirs can inherit the Roth IRA tax-free, as long as the account’s been open for at least five years. Note that most non-spousal beneficiaries must withdraw all the funds in a Roth IRA within 10 years of the original owner’s death.⁴

Roth conversions can also help reduce your taxable estate, which could be particularly useful if your estate is nearing or exceeds current federal exemption limits (about $14 million in 2025; $28 million for married couples) and state exemption limits ($3 million in Minnesota; $6 million for married couples)⁵, ⁶

Any assets above these limits are subject to federal (up to 40%) and, if applicable, state estate taxes (between 13% and 16% in Minnesota). Considering federal exemptions are set to drop to $7 million in 2026, more estates may be affected. 

While the benefits of converting to a Roth IRA are substantial, it’s important to remember that any conversions are permanent — once completed, you can’t return the money to a traditional IRA. 

When deciding whether to convert to a Roth IRA, you must also consider your tax rate now versus later, the tax bill you’ll pay to convert, and your future expenses that could affect your taxes.

• Taxes on the conversion itself: Take stock of your current financial situation and calculate the taxes you’ll incur before deciding if now is the right time to roll over. Can you afford the bill? If so, it might make sense to pay taxes on the converted amount now rather than later in retirement when your income is more rigid. If not, consider waiting until you have the money or take advantage of other retirement optimization strategies.
• Future income and tax bracket: Do you expect your tax bracket to be higher or lower? Keep in mind that all types of earned income are taxable in retirement, including wages, retirement earnings, and Social Security. If you’re already drawing Social Security, for example, a Roth conversion could increase your income enough to have an impact on your taxable income and your available funds in retirement. 
• State taxes: If you plan on retiring in a state that has an income tax, reducing your future earnings via a conversion could help minimize expenses by placing you in a lower tax bracket. Minnesota’s income tax brackets are relatively high compared to other states, between 5.35% and 9.85%, meaning anything you earn in retirement will be subject to both federal and state taxes.⁷
• Medicare premiums: Converting money from a tax-deferred account to a Roth IRA can increase Medicare premiums for Part B and Part D. This is because Medicare premiums are based on income brackets. Individuals in the highest-earning income brackets that also have Medicare can see these premiums exceed $700.⁸ Medicare premiums are recalculated annually based on a two-year lookback period, so you should time your conversions accordingly.
• Five-year waiting period: All conversions are subject to a five-year holding period on withdrawals. Consider your possible expenses between now and then (e.g., college tuition, health care costs, mortgage payments, aging-in-place renovations, etc.) and only convert the money if you think you can do without the money during this time.

Your ability to make tax-free withdrawals in the future is not without its trade-offs. Any Roth conversions you make are taxed as ordinary income — in Minnesota, you’ll owe both state and federal income taxes in the year you roll over funds. The amount of tax you have to pay on a Roth IRA conversion in Minnesota depends on your tax bracket at the time of conversion and how much money you convert. 

A conversion of any size could increase your ordinary tax rate and push you into a higher tax bracket. In 2025, the federal income tax brackets are between 10% and 37%.⁹ As mentioned earlier, Minnesota state taxes range from 5.35% to 9.85%, depending on your income.

The differences could be significant, so it’s important to run the numbers.

Let’s say you earn a taxable income of $150,000 and have $100,000 in a traditional IRA that you decide to convert into a Roth. Your gross income puts you in the 24% tax bracket (reserved for earnings between $103,351 and $197,300 for single filers).

Partial Conversion Example:

If you convert $20,000 of your traditional IRA funds to a Roth, your taxable earnings for the year will increase to $170,000 ($150,000 + $20,000). This keeps you in the 24% bracket, and you’ll owe an additional $4,800 in taxes on the conversion (24% of $20,000). 

If you repeated this exercise over the next four years, your total liability from the conversion would be $24,000 ($4,800 x 5), assuming your earnings stayed the same.

Full Conversion Example:

On the other hand, if you were to convert the entire $100,000 in one year, your taxable income would jump from $150,000 to $250,000. As a result, you’d get pushed into the next highest bracket, 32%. 

This means you’d pay a blended tax on the conversion — 24% on the first $47,300 and 32% on the remaining $52,700 ($250,000 total income – $197,300 bracket threshold = $52,700). In turn, your total liability would be $28,216.

And let’s not forget the state taxes you’d owe as a Minnesota resident. The former scenario that converts only a portion of the funds would incur a 7.85% state tax, while the latter scenario that converts all the funds would incur a tax rate of 9.85%.

There is no way to eliminate your taxes completely, but the math suggests that it may make sense to convert incrementally instead of all at once. Work with your wealth advisor to formulate a multiyear plan for converting enough to maximize your current bracket but not enough to push you into a higher one. 

How to Estimate Your Tax Bracket in Retirement

Guessing what the tax code will look like when you retire would be a fool’s errand because it changes so frequently. Unfortunately, this means that it’s also impossible to know what tax bracket you’ll be in later.  

But don’t worry; all is not lost. To prepare for potential retirement taxes, determine how many income sources you will have in retirement and estimate a number to the best of your ability. For example, you might earn income from: 

• Pensions
• Annuities
• Earnings from other investments
• Inheritances
• Social Security benefits

It’s worth noting that most retirees have lower tax rates than during their working years. But it is possible that your overall financial picture and combination of earnings outside wages might land you in a higher tax bracket and render Roth conversions useless, especially if you’ve been a disciplined saver and expect to have large RMDs from 401(k) plans and individual retirement accounts. 

Again, an experienced wealth advisor can help you explore ways to maximize your retirement income and minimize taxes — Roth conversion or otherwise.

When Is the Best Time to Do a Roth Conversion?

Given what we now know about Roth rollovers, it’s usually best to make Roth conversions when you’re younger and can afford to let the funds sit for five years. This allows you to make moves that maximize your retirement savings now and lower your tax bracket later. Staggering your contributions also gives your portfolio more time to grow tax-free.

Bottom Line

Think of Roth conversions as (one of) your tickets to a more tax-free retirement, a potent tactic for those who worry about the threat of higher tax rates in the future. 

That said, a retirement income and planning strategy should be uniquely yours. While the examples we provide in this article can help make sense of a complex situation, understand that how you tackle taxes in retirement will be based on many factors. 

Schedule a free consultation with one of our wealth advisors today to discuss the best ways to build a tax-efficient retirement plan. 

Sources

1. IRS, “Rollovers of retirement plan and IRA distributions”
2. IRS, “401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000”
3. IRS, “Retirement topics – Required minimum distributions (RMDs)”
4. IRS, “Retirement topics – Beneficiary”
5. IRS, “Estate tax”
6. Minnesota Department of Revenue, “Estate Tax”
7. Minnesota Department of Revenue, “Minnesota income tax brackets, standard deduction and dependent exemption amounts for 2025”
8. Centers for Medicare & Medicaid Services, “2025 Medicare Parts A & B Premiums and Deductibles”
9. IRS, “IRS releases tax inflation adjustments for tax year 2025”