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Roth Conversions – The Error in Conventional Thinking

Let’s start with some definitions before I dive into any acronyms and jargon.

IRA = Traditional IRA
Roth = Roth IRA
NIIT = net investment income tax (3.8% surtax)
RMD = required minimum distribution
Convert = converting pre-tax traditional IRA dollars to post-tax Roth IRA dollars

When tax and financial professionals speak of Roth conversions, the conventional thought is to compare your current marginal tax bracket with your expected future tax bracket. Let me run through the conventional theory before I debunk it.

  1. If your future tax rate will be higher than your current, then you should convert. This means paying the current tax now as opposed to higher taxes later.
  2. If your future tax rate will be lower, then you should not convert. Don’t pay high taxes now and give up the tax deferred growth which you expect to pay less on in the future.
  3. If your current and future tax rates are the same, then we are (theoretically) neutral. We end up with the same after-tax dollar amount whether or not we convert.

To illustrate #3, let’s say my tax rate is 24% today and in the future. Does a $10,000 Roth conversion makes sense? I plan on taking a distribution at 59 ½ when my dollars have grown to $30,000. Without a Roth conversion, I will pay $7,200 (24%) in taxes on the distribution, leaving me with $22,800 net. If I decide to convert the $10,000 and pay $2,400 in taxes (24%) today, I am left with $7,600 which grows at the same rate of return as the “no convert” scenario, to $22,800. Convert or don’t convert, I still end up with $22,800 after-tax dollars.

This neutral result tells the client’s subconscious “Don’t convert; keep the tax dollars in your pocket.”


To be accurate, we should not consider $10,000 vs. $7,600 in our growth projection. It is really [a] a $10,000 IRA plus $2,400 in a non-IRA investable dollars vs. [b] a $10,000 Roth IRA. In this horse race, both my $10,000 IRA plus $2,400 and my $10,000 Roth are going to grow at the same rate. Eventually the $2,400 will cover my future IRA taxes at a 24%.

Under these assumptions, do I want my future $30,000 to be in my IRA or my Roth? I’d say, “Give me the Roth!” If the IRA and Roth both double in value, then so would the $2,400 that I didn’t give the IRS yet, right? No! There is a tax-drag on the growth of the $2,400. At a 15% capital gain rate, its growth would be only 85% of the IRA’s growth rate. It gets only worse if I add in some ordinary tax and NIIT. What looked like an even horse race now appears to have the IRA (“don’t convert”) scenario handicapped with additional weights. To which I repeat: “Give me the Roth!”

This brings me to the realization that my current tax rate can be higher than my future tax rate, and it could still be wise to convert! The true break-even point could be a somewhat higher current tax rate (vs. future). How much higher? The answer depends on the variables such as growth rate, tax rates (current vs. future; ordinary, capital gains, NIIT), and length of time.

I conclude that, all things being equal (especially tax rates), the Roth is the better choice. And at some higher current tax rates, the Roth will continue to be the better strategy. Of course, there is a tipping point where higher current taxes will indicate “don’t convert,” and that is why we analyze these decisions on a client-by-client basis.


First, do people really draw money from their Roth IRAs? Typically, no. They are left to grow and grow and grow. Roths are protected at all costs. We can explain to clients the 3-bucket optimal withdrawal strategy (nonqualified, qualified, and Roth), but they refuse to touch that Roth. (Can you hear the heirs cheering?)

Second, can you really expect the same growth rate on the cash that was saved? I suspect it will be invested more conservatively, left in cash, or maybe spent altogether! This behavior favors the Roth conversion.

Third, the professional tax & financial advisor will be opportunistic in Roth conversions and likely gain a larger than the expected spread between current and future tax rates. By contrast, an RMD is unavoidable, “R” being “required”, notwithstanding our 2020 skip-the-RMD blue moon event. That forced RMD income is like a straitjacket. (The other exception to the “R” is when the funds will go to charity during life or after death, which is a critical factor to consider.)

“All things being equal” . . . Stop! They never are in taxes, life, and withdrawal strategies. Even the variables are variable. Roth conversions are just one tool in the kit and not for everybody.

One thing I know is that aggressive tax and financial planning can work wonders, especially when conventional theory isn’t simply accepted at face value.

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