'The last adviser we worked with lost a significant portion of our portfolio'

"Earlier in our careers, we chose traditional IRAs because the tax deduction made the most sense at the time." (Photo subjects are models.)

Dear Quentin,

I'd appreciate some thoughts on the best approach to Roth conversions.

We're a married couple in our late 50s. We are both still working, have sizable pretax 401(k) balances, and contribute to Roth IRAs. As retirement gets closer, I've started paying more attention to IRMAA and how it could affect Medicare premiums.

Our current situation looks like this: $400,000 in a taxable brokerage account; $1.5 million in pretax retirement accounts; and $125,000 each in Roth IRAs. We both max out our 401(k) contributions (including catch-up), and we max out our Roth IRA contributions each year.

We only recently learned about IRMAA, so it's become a significant consideration. I've already switched my employer contributions to a Roth 401(k), but my wife's employer only offers a traditional pretax 401(k).

Earlier in our careers, we chose traditional IRAs because the tax deduction made the most sense at the time. A friend of mine recently retired and mentioned how much IRMAA is increasing his Medicare premiums.

Would it make sense to gradually reduce our taxable cash and brokerage holdings to pay the taxes on Roth conversions, as long as the conversions keep us within the 22% federal-tax bracket? Our total debt is under $100,000 at a 3% interest rate.

My thinking is to keep roughly six months' worth of living expenses in cash for emergencies and use excess cash to pay the taxes on Roth conversions, rather than withholding taxes from the converted amount itself.

We don't have a financial adviser. The last adviser we worked with lost a significant portion of our portfolio during the 2008-09 financial crisis, so we've been managing our investments ourselves ever since.

If we continue working until 65 or 67, what would be a good Roth conversion strategy?

Planning Our Roth Conversions

Related: I'm 63, a retired CPA with a $1.2 million 401(k). Do I need to bother with a Roth conversion?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

The better question is whether paying the tax on a conversion today will cost you less than leaving that money in the traditional account and paying taxes.

Dear Planning,

Your finances require a full overhaul.

Let go of what happened decades ago with that adviser and start fresh with a CFP (certified financial planner) who can help navigate your tax planning for Roth conversions. The headline? Yes, it makes sense to start taking them now if you can stay within that tax bracket and maximize them when you retire and before you claim Social Security so your income is low.

Taking a step back, this is a good problem to have, not an unusual one. Typically, people who have retirement savings, particularly in traditional accounts, move from worrying over and focusing on the accumulation phase - something you know only too well after the bumps you experienced during the Great Recession - to the equally stressful withdrawal phase.

A CFP can look at your household income and see how that fits within your 22% tax bracket. They would also take into account any additional wages, bonuses and estimated increases in your household income over the next decade, deductions, filing status plus your expected Social Security and pension income, capital gains, and the size and timing of your RMDs.

Ideally, it's good to have an accountant who focuses on tax compliance and single-year issues, and a CFP tasked with portfolio management and tax planning over multiple years. A CFP serves a role more akin, in musical terms, to a conductor. Your future CFP, if you found one you could trust, could oversee the entire shebang with your accountant, assuming you have one.

Eligibility for your ACA health-insurance subsidies and IRMAA surcharges is based on your modified adjusted gross income (MAGI). Withdrawals from traditional 401(k)s count as taxable income, while qualified withdrawals from Roth accounts don't count toward MAGI. Capital gains, dividends and interest on your taxable brokerage account are included.

Roth conversions also count toward your MAGI because the amount you convert from a traditional 401(k) or IRA to a Roth is treated as ordinary taxable income in the year that the conversion takes place. The Internal Revenue Service treats these conversions as income because you are essentially choosing to prepay taxes on them.

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Complicated scenario

As you say, Roth conversions can make sense during those relatively low-income years to reduce future required minimum distributions (RMDs) and potentially future exposure to the dreaded IRMAA (income-related monthly adjustment amount). But a word of caution: Don't assume you should automatically convert just enough to fill the 22% bracket.

Perhaps a more relevant question is whether paying the tax on a conversion today will cost you less than leaving that money in the traditional account and paying taxes - and potentially higher Medicare premiums - later. That's where a CFP who specializes in tax planning can help you. They will do the math, not tell you to buy/sell stocks. Sure, keep managing your own investments.

The answer to your many questions should not be dictated by IRMAA alone. They also depend on your actual income, deductions, projected retirement income, future RMDs, and advice from a CFP on what taxes you will pay during your "conversion window" (typically, after you retire but before you take Social Security and/or your RMDs).

At least 70% of the financial assets you've listed are in traditional, tax-deferred accounts, so you have a pretty good reason to figure out how much of that money you eventually want to move into Roth accounts. If you do a Roth conversion, it's often more tax-efficient to pay tax from cash or taxable assets rather than having it withheld.

Put it this way: If you convert $100,000 and owe $22,000 in taxes, it's best to move the full $100,000 into the Roth. If you're under 591/2, having taxes withheld from the Roth conversion can also create a 10% early-distribution tax on the amount withheld. But that doesn't mean you should drain your emergency fund, either.

Make sure your paycheck withholding or estimated tax payments are enough to cover the additional tax to avoid an underpayment penalty, the fee charged by the IRS when you do not pay enough tax during the year through payroll withholding. None of this is particularly easy or even fun, but it's a luxury problem to have.

It's a balancing act, and one you can't do alone.

Don't miss: My financial adviser says I don't need a tax-efficient withdrawal plan for my $2.3 million portfolio. Is that madness?

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-Quentin Fottrell