Tax Planning
Illinois does not tax a Roth conversion. For a retiree here that removes 4.95% from the cost of every dollar converted — and almost nobody has been told.
A large traditional IRA is not a balance. It is a balance with a mortgage on it, and you do not get to choose when the payments start.
Every dollar in a traditional IRA or 401(k) is money on which tax has been deferred, not forgiven. It comes out as ordinary income — for you, or for whoever inherits it. And at age 73 the choice about timing is taken away from you, because required minimum distributions begin whether or not you need the money.
The result is an outcome that surprises people who did everything right: a retiree in their late seventies paying a higher marginal rate than they paid while working, on income they did not ask for, because thirty years of diligent deferral all came due at once.
A Roth conversion moves money out of that account and into one where growth and withdrawals are tax-free, by paying the tax now instead of later. It only makes sense when the rate you pay today is lower than the rate you would pay later. The whole discipline is finding the years when that is true — and knowing how much to move before something else breaks.
For most people there is a stretch of years when taxable income falls to its lowest level in decades. Work has stopped, so there is no salary. Social Security may not have started. Required distributions have not begun. Nothing is forcing income onto the return.
That gap is the whole opportunity, and it is usually somewhere between five and eleven years long.
The window is not permanent and it is not reopenable. Every year inside it that passes without a decision is a year of cheap conversion capacity that simply expires. That is the cost of waiting, and it never appears on a statement.
This is the part that is specific to where you live, and in our experience it is the single most under-used fact in North Shore retirement planning.
Illinois taxes income at a flat 4.95%. But it allows a subtraction from federal adjusted gross income for distributions from qualified retirement plans — the provision sits at 35 ILCS 5/203(a)(2)(F) and is claimed on Line 5 of Form IL-1040.
A Roth conversion is a taxable distribution from a traditional IRA. It lands in your federal income, and then Illinois subtracts it. There is no age test and no income limit on the subtraction.
So an Illinois resident converting $200,000 pays federal tax on it and nothing to the state. The same conversion by a California resident carries state tax on top of the federal bill.
| State | Rate on ordinary income | State tax on a Roth conversion |
|---|---|---|
| Illinois | 4.95% flat | None — retirement plan distributions are subtracted |
| Texas | No income tax | None |
| Indiana | 2.95% flat, plus county tax | Taxable |
| California | up to 13.30% | Taxable at ordinary rates |
The four states in which Bayworth Capital is registered. Rates current as of August 2026 and subject to change.
Two things follow from this that are worth saying plainly.
First, if you are an Illinois resident, conversions are cheaper for you than for most Americans, and the advantage is largest exactly when the conversion is largest. Second — and this is where it gets sharp — if you are thinking of retiring somewhere else, the sequence matters enormously. Converting while still an Illinois resident and then moving is a very different outcome from moving to a taxing state and converting there. Residency is a question of fact rather than preference, and it is not something to improvise in the year of a large conversion.
Most people assume the goal is to avoid moving into a higher bracket. That is the wrong frame, for two reasons.
The first is that the brackets are enormous. Here is 2026 for a married couple filing jointly:
| Rate | Taxable income — married filing jointly |
|---|---|
| 10% | Up to $24,800 |
| 12% | $24,800 – $100,800 |
| 22% | $100,800 – $211,400 |
| 24% | $211,400 – $403,550 |
| 32% | $403,550 – $512,450 |
| 35% | $512,450 – $768,700 |
| 37% | Above $768,700 |
IRS inflation adjustments for tax year 2026. The standard deduction is $32,200 filing jointly and $16,100 single, so taxable income sits below gross income by at least that much.
Look at the width of those middle bands. A couple can have more than $200,000 of taxable income and still be in the 22% bracket, and more than $400,000 while still in the 24%. A retiree living on $90,000 has an enormous amount of unused room in brackets they will never see again once RMDs begin.
The second reason is more important. The bracket is rarely what stops you. Several other things bite first, and they are the reason a conversion should be sized deliberately rather than filled to the top of a bracket.
IRMAA is the income-related surcharge added to Medicare Part B and Part D premiums. It is assessed on modified adjusted gross income from two years earlier, so a conversion made in 2026 sets your 2028 premiums.
The thing that makes it dangerous is that it does not phase in. It is a series of cliffs. One dollar over a threshold moves you into the next tier entirely — for both spouses, for twelve months.
| 2026 MAGI — married filing jointly | Part B, monthly | Part D surcharge |
|---|---|---|
| $218,000 or less | $202.90 | — |
| $218,001 – $274,000 | $284.10 | $14.50 |
| $274,001 – $342,000 | $405.80 | $37.50 |
| $342,001 – $410,000 | $527.50 | $60.40 |
| $410,001 – $750,000 | $649.20 | $83.30 |
| $750,000 or more | $689.90 | $91.00 |
2026 premiums, determined by the modified adjusted gross income reported on your 2024 return. Amounts are per person — a married couple pays these twice.
Read that first step carefully. Crossing $218,000 by a single dollar costs a couple roughly $2,000 across the year in additional premiums between them. That is not a reason to avoid converting. It is a reason to know precisely where the line sits and to stop just below it — or, having decided the conversion is worth more than the surcharge, to cross it deliberately and go well past, rather than stumbling a few thousand dollars over for nothing.
The One Big Beautiful Bill Act created an additional deduction of $6,000 for each taxpayer aged 65 or over — $12,000 for a couple where both qualify — available for tax years 2025 through 2028, whether or not you itemize.
It phases out on modified adjusted gross income above $75,000 single and $150,000 filing jointly. A conversion raises MAGI, so for someone near those thresholds part of the real cost of converting is the deduction quietly eroding. It is temporary, which cuts both ways: it argues for smaller conversions through 2028, and for larger ones afterwards.
Up to 85% of Social Security becomes taxable depending on your other income. Conversion income counts toward that calculation, which means a conversion can pull benefits into tax that were previously untouched. The effective marginal rate through that range can run meaningfully higher than the bracket suggests — one of several reasons converting before claiming is often cleaner than converting after.
A conversion is not itself net investment income, so it is not directly subject to the 3.8% surtax. But it raises modified adjusted gross income, and that can drag your dividends, interest and capital gains above the threshold where the surtax applies. The conversion escapes it; your other income may not.
And the pro-rata rule, if you have any non-deductible basis. You cannot convert only the after-tax portion of your IRAs. The IRS treats all your traditional, SEP and SIMPLE IRAs as one pool and taxes conversions proportionally. Anyone who has made non-deductible contributions, or is considering a backdoor Roth while holding a large rollover IRA, needs this modelled before acting rather than discovered in April.
And who it does not suit: anyone who will genuinely be in a lower bracket later, anyone who would have to raid the IRA itself to pay the tax, and anyone planning a large charitable bequest — a charity receives a traditional IRA tax-free, so converting first means paying tax nobody needed to pay.
A conversion is one decision that touches your federal return, your state return, your Medicare premiums two years out, how much of your Social Security is taxed, your estate, and what your children inherit. Your CPA sees the return after the year has closed. Your custodian processes the transaction. Neither is positioned to tell you the number in advance.
That coordination is the job we do — the quarterback role, holding the whole picture rather than one part of it. And because we are a registered investment adviser held to a fiduciary standard, we are obliged to tell you when the answer is that you should convert less, or nothing at all.
If a business sale is part of your picture, the two decisions are closely linked — see exit planning and what you actually keep when you sell.
The answer turns on your age, your pre-tax balance, your spending, and when Social Security starts. It is a short conversation to find out — and the years inside the window do not come back.
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