Roth Conversions: The Basic Math
Converting pre-tax retirement money to a Roth means paying tax now to avoid tax later. Whether it pays depends on your tax rate now vs. later and where the tax money comes from. Here is a worked example.
A Roth conversion moves money from a pre-tax account, such as a traditional IRA, into a Roth IRA. The converted amount is added to your taxable income for the year. In exchange, future growth and qualified withdrawals are tax-free, and Roth IRAs have no required minimum distributions during your lifetime.
The core trade
You're choosing between paying tax now, at your current rate, or later, at your future rate. Two factors decide the outcome:
- Your tax rate now vs. later.
- Where the tax money comes from, whether from outside savings or from the converted amount itself.
A worked example
A hypothetical investor converts $50,000 in a 22% bracket, paying the $11,000 tax from a taxable savings account. The money grows at 6% for 20 years. In the no-conversion case, the $11,000 stays in a taxable account, growing about 5.1% after taxes.
After-tax result depends on the tax rate when the traditional money is withdrawn:
| Future tax rate on withdrawals | Don't convert (after tax, including side account) | Convert | Better choice |
|---|---|---|---|
| 12% | $170,861 | $160,357 | Don't convert, by about $10,500 |
| 22% (same as now) | $154,825 | $160,357 | Convert, by about $5,500 |
| 24% | $151,618 | $160,357 | Convert, by about $8,700 |
Show the numbers behind this chart
| Don't convert | Convert (tax paid from savings) | |
|---|---|---|
| Future rate 12% | $170,861 | $160,357 |
| Future rate 22% | $154,825 | $160,357 |
| Future rate 24% | $151,618 | $160,357 |
Notice that at the same tax rate, converting still came out ahead. That's because paying the tax from outside money effectively moves more money into a tax-free account. If the tax is paid from the converted amount instead, the advantage at equal rates disappears, and if you're under 59½, the withheld amount may also face the 10% additional tax.
Other factors
- Brackets: converting enough to "fill up" a lower bracket each year, rather than all at once, can keep the tax rate low.
- Medicare premiums: conversions raise income and can trigger IRMAA surcharges two years later.
- Required minimum distributions: conversions reduce future RMDs; see RMDs explained.
- Heirs: Roth accounts can be more tax-efficient for many beneficiaries.
- The five-year rules: converted amounts have their own five-year rule for penalty-free access if you're under 59½.
- No undo: recharacterizing (reversing) a conversion is no longer allowed.
The takeaway
A Roth conversion pays off when your future tax rate is likely to be the same or higher than today's, especially when the tax is paid from outside savings. It often makes sense in low-income years, such as early retirement before Social Security and RMDs begin. A tax professional can model conversions across several years.
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