Roth Conversion for Tech Employees: Why Waiting for the Next Big Salary Costs More

The last paycheck starts a 90-day clock

Most laid-off engineers assume the tax questions can wait until spring. The calendar disagrees. Many equity plans give departing employees about 90 days to exercise vested ISOs (incentive stock options), so Svetlana finds her exact window in the grant agreement and the plan document in the equity portal. Exercising ISOs in the same year as a conversion changes the alternative minimum tax math, so both get modeled together before either happens. The ISO exercise planning page covers that side.

Health coverage is the next date. The belief is that insurance can be sorted out later; the rule is that the COBRA election notice gives 60 days to decide. If the family buys an ACA marketplace plan instead, conversion income raises the MAGI (modified adjusted gross income) used for premium tax credits. If Pavel's school plan can cover all four of them, settle coverage before sizing any conversion.

Then gather the papers. An old 401(k) can stay in the plan if the plan allows in-plan Roth conversions. Moving it to an IRA first takes a few weeks of custodian paperwork, so start that by October.

Health coverage comes before the math

Papers to gather and where they live

• Final pay stub: year-to-date wages, withholding (payroll portal)
• Severance agreement (HR)
• Last year's Form 1040, taxable income line
• Rollover IRA or old 401(k) statement: balance, holdings
• Old Form 8606 showing after-tax IRA basis
• Pavel's 403(b) statement

Does January severance spoil the low-income year?

Yes, if it lands in the gap year, because severance counts as wages in the year it is paid, and unemployment benefits are taxable too. A hypothetical $120,000 severance paid in January goes straight into the estimate and can use up most of the cheap bracket room.

If the agreement lets Svetlana pick the payout date, a December payment in her last working year can leave the next year almost empty. Read the agreement's wording before assuming she has a choice.

How much can you convert before the rate jumps?

Your conversion room is the gap between expected taxable income and the top of the bracket you're willing to fill. For Svetlana and Pavel, the starting point is $37,800 of taxable income, which is Pavel's $70,000 salary minus the $32,200 standard deduction the IRS sets for 2026 for married couples filing jointly. Our calculator runs the same steps with your own numbers.

The shortcut is five steps:

Belief: the conversion is just a number you pick. Rule: it's a result of the steps above, and a few thresholds can move it.

The conversion is ordinary income, so it raises AGI and MAGI. It is not net investment income itself. But if it lifts MAGI over $250,000 joint, dividends and gains in the taxable account become subject to the 3.8 percent net investment income tax. A conversion can also trim child-related credits and ACA premium credits, and some states tax conversions fully, so check yours. The Roth IRA contribution phase-out ($242,000 to $252,000 joint for 2026) does not limit conversions.

Before running the numbers, Modera Wealth Management writes down which fund inside the rollover IRA would move. The holding chosen for the Roth matters as much as the dollar amount.

The five-step estimate

Which income counts and which thresholds move

• Add expected income: Pavel's salary, severance, unemployment, taxable interest and dividends, RSU vests before the last day
• Subtract the standard deduction or your itemized total
• Look up the top of your target bracket in the current IRS table; don't guess it
• The gap between steps 1 and 2 and that top is your room
• Multiply the room by an assumed average rate; confirm cash outside the IRA covers the tax bill

$150,000 converted at 41 costs $22,500 less than waiting for the next job

For illustration, take two hypothetical households. Svetlana, 41, leaves the chip designer in January and takes the year off. Pavel, 43, keeps teaching at $70,000. After the $32,200 standard deduction, their taxable income before any conversion is $37,800.

Household A converts $150,000 of her $500,000 rollover IRA in the fall. At an assumed 20 percent average federal rate, that's a $30,000 tax bill, paid from taxable savings. All $150,000 lands in the Roth.

The twin household is identical in every way but one: it waits two years, until Svetlana is back at a $350,000 salary. It converts the same $150,000 at an assumed 35 percent, for a $52,500 tax bill. That's $22,500 more, and the twin's Roth gets two fewer years to grow.

The compounding is where the gap widens. Assuming 6 percent a year, for illustration only, $150,000 grows to about $360,000 by the time Svetlana is 56, a factor of about 2.4 over 15 years. The same $360,000 left pretax would come out taxed, and later on a required schedule. Markets can fall, and the converted dollars can shrink with them. The tax on the full $150,000 was paid back at 41, so the couple carries that risk on money it has already paid tax on.

Two households, one difference

What 15 years does to the same $150,000

December 31 closes the window; growth funds go into the Roth

The money has to leave the IRA by December 31 to count for that tax year. Custodians slow down in late December, so submit by early December. Conversions can no longer be undone (recharacterized), so decide on final numbers, not hopes. To cover the tax, the couple can send an estimated payment for the last quarter by January 15. Or Pavel can raise the withholding on his paycheck. For penalty purposes, the IRS counts withholding as if it were spread evenly over the year, so a late increase can still head off an underpayment penalty.

Modera Wealth Management's approach to the Roth's contents follows asset location: convert in kind the holding with the highest expected long-run growth, such as the broad stock index fund. Bond funds stay in the remaining rollover IRA or Pavel's 403(b). Don't make a single company's stock the Roth's biggest position; the concentrated stock page covers that risk.

Two small slips tend to travel together. Having the custodian withhold 20 percent of a $150,000 conversion means $30,000 never reaches the Roth, and for someone under 59½ that withheld $30,000 draws a $3,000 penalty. Then leaving the remaining $120,000 in a bond fund compounds the damage. Assuming 3 percent for bonds and 6 percent for stocks, $120,000 grows to about $187,000 in 15 years, while $150,000 paid from outside cash and invested in a stock index fund reaches about $360,000. Combined, that's a $3,000 penalty now and roughly $173,000 less tax-free money at 56.

Next January brings Form 1099-R from the custodian. Form 8606 goes in with the return by the April deadline.

Why the table's last row decides the amount

Where the dollars go once converted

Is a conversion still worth it with 10 years to go, or only five?

Yes, usually, if you expect the same or a higher bracket later, but the payoff shrinks as retirement gets closer. At 41, an illustrative 6 percent a year multiplies converted dollars about 2.4 times by 56. At 55, five years to 60 multiplies them only about 1.34 times.

What you gain is tax paid at a known low rate, tax-free growth, and no required minimum distributions on the Roth. That matters because both spouses were born after 1960, so RMDs start at 75 on whatever stays pretax. What you give up is cash now, which might fund a long job search and would have kept compounding in taxable. Pass if you expect a much lower bracket in retirement or a move to a state with lower income tax.

Once Svetlana is back at work and turns 50, the $8,000 catch-up (2026 figure) must go in as Roth if her prior-year FICA wages topped $150,000. Roth money will build anyway later; the conversion question is only about the pretax balance already sitting there. Each conversion also starts its own five-year clock for the 10 percent penalty on converted dollars withdrawn before 59½, so don't convert money the family may need within five years.

The catch-up years

What the five-year clock means

Pavel, the children and the 10-year clock

If Svetlana dies first, Pavel can treat her Roth as his own and owes no tax on it. In later years he would file as single, with narrower brackets, which makes inherited pretax money costlier for him. Children who inherit a Roth must take out the full balance by the end of the tenth year, but tax-free. An inherited traditional IRA would be taxed at their own rates, possibly in their peak-earning 40s. A conversion can open a new Roth account, so update its beneficiary form the same week.

A conversion estimate from Modera Wealth Management before December

Modera Wealth Management can run the five-step estimate from your final pay stub and IRA statement and mark which fund would move into the Roth. The result goes into a short playbook with the December and January dates. You sign an agreement that sets out the fee before we start the estimate.