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MY FAMILY HAS BEEN regularly visiting a remote corner of southwest England since 1968, when I was five years old. My maternal grandparents retired to the area, and for a while my parents owned a holiday house nearby. It is, to me, the world’s most beautiful place.
Decades ago, while walking the country lanes, I came across the ruins of a church that was under the protection of a group called Friends of Friendless Churches, a name that made me chuckle. Lately, I’ve been thinking we need a similar group in the U.S.—to offer support for traditional, tax-deductible retirement accounts, which also seem to be notably friendless.
In recent years, I’ve seen repeated comments from retirees lamenting the big tax bills they now face as they draw down their traditional 401(k)s and IRAs, and how they wish they’d never funded these accounts. Many are taking evasive action, including converting big chunks of their traditional retirement accounts to Roths, something I’ve also been doing. Still, all the handwringing strikes me as overdone, because it ignores four often-overlooked benefits that traditional 401(k)s and IRAs offer.
Tax-free growth—or better. Roth accounts, which don’t offer an initial tax deduction but do give investors tax-free growth, were introduced in 1998. That means many of today’s retirees had no choice early in their career but to fund traditional retirement accounts, where you get an initial tax deduction but all withdrawals are taxed as ordinary income.
But here’s what folks forget: Tax-deductible retirement accounts can also give you tax-free growth, just like a Roth. If you’re in the same tax bracket when you draw down a tax-deductible retirement account as when you funded it, the initial tax deduction effectively pays for the final tax bill. In fact, if your tax bracket in retirement is lower than it was during your working years, you can come out ahead, making more from the initial tax deduction than you lose to the final tax bill. You can read an explanation of the math here.
One way you can take advantage of a lower tax bracket in retirement: convert part of your traditional IRA to a Roth. I made big Roth conversions in 2022 and 2023, and I’ll probably do another one this year, with a view to shrinking my required minimum distributions once I’m in my 70s.
I’ll need to be more careful starting in 2026, because I’ll be turning age 63 that year. The issue: Boosting my taxable income with Roth conversions could drive up my Medicare premiums once I turn age 65. On top of that, the 2017 income-tax cuts may sunset at year-end 2025. In any case, I don’t want to overdo the Roth conversions—and I certainly wouldn’t want to have everything in Roth accounts—because there are some good reasons to keep a decent sum in traditional retirement accounts.
Filling those lower brackets. Many folks love the idea of paying zero income taxes. They shouldn’t. You don’t want to pay high taxes during your working years and then find yourself paying nothing in retirement. Instead, ideally, you pay a similar tax rate throughout your life. Filling up tax-deductible retirement accounts during your working years and then draining them in retirement can allow you to do just that.
Are you retired with little taxable income? Drawing down your traditional retirement accounts or converting them to a Roth can allow you to take advantage of the 10% and 12% federal tax brackets, which strike me as a bargain. To hit the top of the 12% tax bracket in 2024, a married couple could generate as much as $123,500 in income, after factoring in the standard deduction. What if you had all your money in Roth accounts? You wouldn’t be able to take advantage of these lower brackets, which would be a shame after a career during which you might have paid taxes at 22% or higher.
Giving back. Money in a traditional IRA would also allow you to take advantage of qualified charitable distributions (QCDs) once you reach age 70½. A QCD is one of the most appealing ways to support your favorite causes.
True, you won’t get a tax deduction for your charitable contributions. But the money that goes directly from your IRA to a charity avoids all income taxes, which means your gift is effectively tax-deductible. On top of that, the withdrawal counts toward your required minimum distributions, which these days kick in at age 73, and you can get the tax savings while also taking the standard deduction, a double win not available for regular charitable contributions. In effect, by funding a tax-deductible retirement account and then later making QCDs, you get a handsome tax break during your working years, plus you avoid the tax on all subsequent growth.
What if you’d funded a Roth instead? Sure, you could make a QCD from your Roth. But you wouldn’t be doing the charity any special favor—it doesn’t pay taxes whether the money comes from a Roth or a tax-deductible account. You, on the other hand, should be kicking yourself, because you effectively missed out on a valuable tax break by funding the Roth.
Paying medical costs. Many of us will face steep medical costs later in retirement. If those costs exceed 7.5% of adjusted gross income, they’re deductible on Schedule A. The expenses that qualify for the deduction include many related to long-term care.
Thanks to the deduction for medical costs, you could potentially tap a traditional retirement account and pay little or no tax on your withdrawals. What if you avoided traditional retirement accounts or earlier converted everything to a Roth? The medical deduction could be worthless to you.
The upshot: Most folks should go for tax diversification, funding both traditional and Roth accounts during their working years. And while it’s tempting to make big Roth conversions early in retirement, especially if you find yourself in a low tax bracket, don’t overdo it. In your later years, you may face hefty medical expenses, find yourself in a low tax bracket or want to make QCDs—and, at that juncture, you could put your traditional retirement accounts to good use.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X (Twitter) @ClementsMoney and on Facebook, and check out his earlier articles.
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Thank you for another illuminating article. I’m interested in doing Roth conversions but since my husband and I just retired, we haven’t done any yet. The tricky parts for us is that we have both pensions and rental income that boost our income “floor”. It’s a good problem to have so I’m not complaining. The really tricky part is my husband’s parents passed away in ’23 and the estate hasn’t been settled yet. As of now, I have no idea what our AGI is for last year with inherited $ adding on to our other income. Currently, tax favored assets, such as Roths, are only about 8% of our investable assets and I’d like to bump that up a bit. But I feel better knowing there could be some good strategies to be had with the regular IRA funds that don’t get converted. Humble Dollar is a gem!
Another helpful article. I may be on the younger side of Humble Dollar followers and read the articles daily while enjoying morning coffee. Love the sharing of experience and knowledge from those who are a bit ahead of me age wise. I suspect that upon retirement I will owe all of the contributors a great dead of graititude.
Ditto!
Ideally, I would hold a tax diversified mix of Roth, traditional IRA and taxable brokerage accounts. Most of ours consist of the latter two. I did make one Roth conversion a couple years ago. We will begin taking RMDs in two years, but I’m undecided whether to make any additional Roth conversions before then. I appreciate this article and the many comments!
I’d guess most of those in the 12% bracket would benefit from Roth conversions up to the top of the bracket, prior to taking Social Security. I believe the tax torpedo can multiply your marginal rate by 1.5 or 1.85.
Diversification. I funded both pre and post-tax accounts during my working years. Always took advantage of employer matches.
I’ve been converting reasonable amounts to my Roth while in the12% bracket. Will take a wait and see approach after the Trump tax cuts expire.
In any case, there will be sizable amounts left in my pre-tax IRA and 401k. Will use them accordingly, as my charitable. medical, and tax expenses fluctuate.
Great article Jonathon, especially the last part about paying medical costs which is something I hadn’t heard of. I’ve been going big on converting non-Roth to Roth over the last several years like many others but this has got me thinking about backing off on it. Good advice on having a balance for both accounts.
Going against the grain, I’ve been on about a 9 year tear to convert both my and my wife’s Trads to Roths, and am just as determined as ever to finish it out, providing we both live long enough, retired 24 years, now age 83, wife 7 years younger, both in good health. My Trad is completely converted and we need three more January 1sts to finish the job for my wife’s. It all started years ago with zero debt, paid off home with upwards of a quarter mil remodel costs, three new cars in the garage, many other amenities, all paid for by a 15 year bull market, with no other big ticket items to buy in today’s world. Had nothing else to do with our RMDs and decided to use them for conversion Federal taxes, which was painless. Plus I’ve increased conversion amounts for the last 3 years into the next higher Medicare payment to get the job done quicker, also painless because SS cost of living increases have more than covered higher Medicare costs, while holding AGI to 250,000 to avoid the 3% Medicare tax. Still leaves me with near 120,000 to convert. I’ve heard all the arguments against doing what I’m doing, weak in my opinion, but remember the main truth in all of this…..Uncle Sam WILL get his, whether I pay it or my heirs pay it. Guessing also that my children will highly enjoy receiving a deep 9 figure inheritance completely tax free.
John Harville
I guess this is a controversial subject. You’ve gotten a lot of downvotes. WTH? I’m bullish on Roth too. At first I listened to tax preparers admonitions that it was to “lose money” but came to a different conclusion for my circumstances. Carrots and sticks. I learned a long time ago that it is easy to work very hard to avoid perceived penalties just because they are perceived penalties, and realize it was better to take the penalty than to avoid it. I’ve been maxing my 401k-Roth and doing small chunk conversions each year since I’m still working. If you’ve got just enough money to retire, then you gotta be careful. If you have an abundance the rationale may be entirely different.
Off the top of my head how could not paying taxes be bad? But then I remembered you can’t take deductions if you don’t have any tax lability.
This year God willing, I’m doing a solar panel system install which will give me more tax credits than I can normally use since I’m retired. I think I’m going to do a Roth conversion and use them to help offset some or all the taxes.
The great thing about solar energy credits is that even if I don’t use them all this year they can be used in future years (only for panel installs, other energy credits have to be used the same year).
I’m definitely in agreement with the sentiment of “Roth conversions are useful, but don’t get too carried away”. Only a few small tweaks to our excessively complicated tax code could make them somewhat less appealing. For example, what if Congress changed the provisional income formula that determines how much Social Security is taxable to include Roth distributions, how would you feel about excessively large conversions then? Or maybe tweak the provisional income formula in a slightly different way–such as raising the taxable thresholds, or indexing them to inflation? Keep all of this in mind as you plan your conversions–and like Jonathan says, don’t overdo it.
Great article on a very complicated subject.
Thank you for the article.
I consider myself somewhat intelligent but when I read articles such as this I feel like there is not much I can do because if I do one thing then something else is affected so I end up doing nothing. There are too many variables and unpredictable outcomes.
why have we made things so complicated?
You may want to connect with a fee only advisor to bounce your ideas off of
Well said, Jonathan. This reiterates the idea that the Roth is given more credit that it deserves:
https://thefinancebuff.com/case-against-roth-401k.html
Look Roth and certainly conversions aren’t for everyone. But these articles like the one you linked that claim it isn’t good for most people hinge on making assumptions.
You might have missed a stimulus payment? You’ve got to be kidding. Roth 401k is “good for people in low-paying jobs now but expect to have high-paying jobs later.” Um, what about people like me who never had a high salary but were successful investors? I know my taxes will be higher in the future because of my investments. Dividends alone –and I’m emphatically not a dividend investor– are ensuring this.
Or how about the idea from the piece that “it easier to qualify for the full employer match when you contribute to the Traditional 401k with pre-tax dollars.” Wut? I’ve never been a high income earner, and I’ve never failed to get the employer match? That is nonsense.
I could go on and on just on this one article. No one is arguing –or should be– that everyone should be Roth converting or using a 401k-Roth. Some do and they are extreme. But articles by people like “The Finance Buff” just go to the other extreme. I find the assumptions baked into these extreme articles about Roths invariably show they are obsessed with a view of the average person and circumstances. But real pros would not generalize so much on unstated assumptions.
You’ve made me have second thoughts on my ongoing conversions, I will need to ponder this subject some more. Thanks!
Nice insights, Jonathan. Thank you!
Funny how people criticize parties for lowering taxes (will increase the debt etc) while doing everything possible to make sure they follow the rules to lower their own taxes.
The 2 are not necessarily incompatible. Alot may have to do with one’s beliefs on who should benefit the most from tax cuts.
I’m guessing that should be the people who pay the most in taxes.
Thanks to all who commented here. Good perspectives. As one that strives to minimize taxes owed, I’ve been deliberating this subject matter far more than what is reasonable.
Bottom line: I’ve been extremely fortunate to have earned a very decent paycheck during my career days and it is indeed very easy to forget about the upfront tax break of nontaxable retirement savings that I enjoyed. Those savings and the earnings from them have helped make today (warts and all) yet another great day and for that I’m thankful. Do your homework, make a decision and get on with it and enjoy life. You don’t have to go “all in” with one decision. Adjust as you go forward into the unknowns of the future. And yes, I’m still learning to do this as well.
Best wishes to all for good health and much joy.
This paper indicates conversions probably aren’t to my benefit When and for Whom Are Roth Conversions Most Beneficial?
Despite marginal rates being lowered by Congress for 60% of the years between 2000 and 2025 my rates while making traditional contributions were still higher than are or will ever be in retirement.
Thanks for the link to the paper.
Good argument for converting to Roth to the top of the 12% bracket and not venturing into the 27% (12+15 qualified dividend/long term capital gain) marginal rate.
This waa precisely the logic that drove me to open a traditional IRA (years before the Roth was legislated). It lowered my immediate tax bill, I had enough to get by without borrowing and “[I]f your tax bracket in retirement is lower than it was during your working years, you can come out ahead, making more from the initial tax deduction than you lose to the final tax bill.”
Since then, income tax rates have dropped. But they could go up (or down).
Excellent analysis and observations! Trying to predict tax rates in the future is even more futile than trying to pick active mutual funds.
You are one of the very few commentators in the personal finance space to point out that Roth conversions may not be the most optimum strategy for everyone. In 2015 who would have guessed that overall tax rates would be lower in 2017? Listening to the gurus who were advocating Roth conversions pre 2016 would have resulted in much higher tax liabilities for conversion. And who knows what’s going to happen 12 months from now?
In finance I fall in the camp that embraces the position of Judge Learned Hand when he wrote, in the Helvering v. Gregory case, that, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury, there is not even a patriotic duty to increase one’s taxes.”
I believe changes in our tax laws are inevitable. I see prudent, flexible and ongoing planning and actions based on existing tax law and rules and anticipated future changes as necessary to achieve my low tax goal. Doing so while keeping my finances simple and secure is my biggest challenge as I try to balance my financial goals with the remaining time I have and my health goals.
The trouble with thinking about tax brackets today is that everyone is looking at them with filters that create cognitive dissonance. In 1970, while I was in the USAF, I wrote to my congressman complaining about the fact that as a 1st Lt. with just $12000 of taxable income, I was in a 40% tax bracket. All tax brackets today are much more favorable to the taxpayer than 50 years ago. If your experience is only with today’s very low (historical) level, you lack perspective.
And the brackets themselves give a distorted picture of what actual percentage of our real total income we are paying. And the actual number of dollars impacts perspective as well. So you paid $25000 in tax. Sure it seems like a lot, but if you are a retired senior citizen you probably earned over $200k, And $25k is just 12.5% of your income.
Still, if you are able to retire at 55 and do some Roth conversions, the longer time the dollars will be in the Roth can create significant sums. But, for most folks it is difficult to do enough conversions to prevent having a substantial TIRA balance at age 72. If between your TIRA and Roth, you have a couple of million, you are rich indeed. Say your thanks, and pay your taxes.
While the tax brackets are more favorable, the deductions aren’t. I think in the long run it’s a wash.
With respect to QCD’s, don’t forget that most states start with the federal adjusted gross income, so, your charitable contribution is effectively tax deductible for state income taxes, and, if your income is substantial in retirement, what you convert from RMD to QCD won’t add to wages for IRMAA purposes.
On the other hand, with respect to Roth conversions, don’t forget state income taxes.
So, when folks talk about “asset location” and retirement income, there may be a little “tongue in cheek” regarding the actual state residence.
So if you are in the 12% tax bracket in retirement it’s better to pay 12% tax on a traditional account withdrawal than 0% on a Roth? I dont get that logic.
Think of it this way: Is it better to fund a Roth during your working years when you’re in the 22% bracket and then take withdrawals at 0% — or fund a tax-deductible IRA during your working years and deduct those contributions at 22%, and then take withdrawals at 12%? If you run the numbers, you’ll find the latter scenario is more favorable.
OK I see that – in the Roth case you pay a net 22%, while in the traditional case you pay a net 10%. However what about the account’s growth? In the Roth case all the growth is tax free, while in the traditional case you are paying the 12% on the money you invested as well as all the growth – which could be substantial. So it will vary on a case by case basis.
True, but what you’re missing is that the tax you pay out (and no longer have) on the Roth conversion would have also grown at that same rate as the Roth account growth – so the ultimate traditional vs Roth IRA decision always comes down to tax bracket arbitrage – except we don’t really know future tax brackets so tax diversification makes lotsa sense. Secondarily of course, Roth accounts have obvious legacy benefits.
Jeffrey Goers was (I assume) referring to funding a traditional vs. Roth account. Here’s a nuance on conversions: If you convert a traditional retirement account to a Roth, and your tax bracket thereafter stays the same, it can look like a wash — that you simply paid the tax on the traditional retirement-account withdrawal earlier rather than later. But there’s also the issue of what money you use to pay the bill. If you pay the conversion tax bill with taxable-account money, you avoid the taxes that would have been owed on the future growth of that taxable-account money — which is a vote in favor of converting.
To understand how growth factors into the issue, please see this link:
https://humbledollar.com/money-guide/how-to-think-about-that-tax-deduction/
The bottom line: The initial tax deduction can pay the final tax bill — and, in cases where your tax bracket declines, you make out at Uncle Sam’s expense.
You have such an interesting childhood background where you grew up and continue to visit. Have always wanted to see your homeland. Your photo collection must be amazing.
This article certainly opens the window to many questions I always wonder about. I’m not savvy enough to fine tune a tax strategy and could benefit from a more knowledgeable person, but they all seem to be booked up and not taking on new accounts.
In my opinion there is zero chance the tax rates will remain as low as they are now no matter where the political winds blow. The current rates are non-sustainable and are a major cause of the “inflation tax” we have been dealing with for the past several years. Of course my opinion could simply be a fiscal-conservative fantasy.
Much of the handwringing seems driven by sensational descriptions of ticking tax bombs or tax infested accounts. I find such language used by otherwise reputable person finance gurus unfortunate. Additionally, most Americans are woefully misinformed about taxes. I just may scream the next time I read a tirade from a longtime tax deferred account participant lamenting inability to roll everything directly into a Roth IRA tax-free. Do folks understand government services cost money? Reasonable people can debate government spending, priorities and outcomes but bills must be paid.
The rest of the world must be in pretty bad shape. Until I retired April of 2022, combined federal, social security and state taxes were taking just under 50% of my gross pay. Then I still had to pay local property and sales taxes out of what was left. Former president Ronald Reagen said something like the more money you give the government the bigger it will get.
It’s hard to believe that before 1913 there was no federal income tax.
“Reasonable people,” haha that eliminates about half the country on both sides easy.
And Americans also don’t understand we are among the lowest taxed countries in the world.
Did many partial Roth Conversions to have it instead of a LTC policy
Do we really know tax rates will rise in 2026 if the GOP remains in power??
For the next two yrs converting to Roths is prudentt
Keep in mind that, for tax rates to stay where they are, legislation needs to be passed by both the House and Senate, and then signed by the president. No matter who wins the next election, any legislation will involve a lot of horse-trading, with all kinds of special interests trying to influence the final bill.
Tax diversification is an under-discussed topic. I had no real opportunity for Roth investments during my high earning years so my Roth’s were funded with conversions of rollover 401k’s as I am on a glide path to SS at 70. I also saved in taxable accounts with significant embedded capital gains, dividends and interest income to fund our life. You can’t guess which way the tax winds will blow so being nimble is about all you can do. You learn that taxes and medical expenses are the game when you are in your 60’s.
I did not do Roth conversion when I first retired. But an article a few years ago reminded me how much taxes will increase if the Trump taxes are reversed in 2026. Since then I have done large Roth conversions the past 3 years and will likely do one this year. These put us in the first penalty tier for IRMAA but, IMO, that was the lesser evil.
When I retired 13 years ago, 90% of our investments were in TIRAs. Today it is down to 24%. I also do QCDs, so I need to leave some room in TIRAs for that unless charitable giving is impacted by future tax changes.
Have you calculated how long you need to have tax free earnings in Roth to offset what taxes you paid at conversion?
For me it is a matter of having a long time horizon, and that makes math difficult and unnecessary. I come from long living stock and do not plan on tapping Roth funds, possibly ever. That makes for a long time horizon –up to 35 years including heirs having 10 to empty it. I think making accurate fine calculations over such long time periods isn’t feasible. I can afford to pay reasonable rates and that’s all that matters to me.
We currently make charitable contributions via a donor-advised fund with Fidelity, but we plan to start using the QCD option instead as soon as we’re old enough. I wonder if they’ll raise the QCD age as they did with the RMDs. I feel like they just forgot about it when they raised RMDs from 70 1/2 to 73.
Excellent article. The paragraph about using IRA funds for medical expenses hit home. When my mother-in-law was diagnosed with dementia, virtually all of the costs of care that usually weren’t considered qualified medical expenses, became deductible. Her facility cost about $6K per month ten years ago. Most of that was deductible. We used these deductions over a number of years to draw down her IRA basically tax-free. When we moved all her IRA funds to after tax, we also harvested some gains at the 0 LTCG tax rate. We would have done more but she passed away that year. With the right diagnosis, our tax deferred accounts can help fund our – hopefully much later – infirm years.
Thanks, Jonathan and Rick, for discussing the medical expense taxation scenario. It is hard to quantify using this method in any calculation with so many unknowns. But it does provide a reasonable justification in my risk analysis for leaving some of the IRA and 401k portfolios funded in order to make the RMD’s slightly more tax efficient.
The real travesty is that 30-40 years ago, young workers were browbeaten by their employers to maximize 401(k) savings during their low-income, lowest tax-rate years. Many workers followed this advice to diligently over-save, and now find themselves in much higher tax brackets plus paying totally unanticipated extra costs like IRMAA. Companies and their fee-earning financial advisors promoted the 401(k) to replace their declining pension programs, but never once did any advisor warn about the potential penalty for signficant tax bracket creep.
I’m ok with making more and paying more tax
I was one of those employers pushing saving in the 401k in addition to a pension. I don’t recall having a crystal ball to tell us about future tax code or other changes.
Regardless of the tax bracket, those employees have more income and a better financial state than without the 401k.
Everyone was happy not to pay taxes at the time and saving pre-tax allowed people to save an extra percent or two, in some cases increasing the employer match received. I wish we had browbeaten more. Those who over-saved were few and far between.
401k plans were not the cause of pension terminations, but they sure were better then nothing and what about the majority of workers who never had a pension? in fact, for most of todays workers 401k plans are better than a pension.
Don’t get me started on IRMAA. There is nothing wrong with income based premiums. I sure wouldn’t trade my income to a level to avoid IRMAA. Many employers use the same approach for their health benefits.
I’m with you on this one, Dick. My employer was Fortune 100, and although we were educated on the benefits of the 401(k), there was no browbeating. As you say, I wish I had been browbeaten more. I didn’t contribute a lot in my early years and missed out on the compounding those early funds would have had over 30-35 years.
Browbeaten? There are many cash-strapped retirees today who wish they’d been browbeaten! I would smile at your over-saving, rather than wringing your hands.
I have many friends and acquaintances that agree with articles’s statement on “lamenting the big tax bills they now face.” They and I also fully agree that this is a good problem to have. My above comment responded on how our pateralistic companies got many of us here – and remember we originally had to buy employer stock.
Going forward, these points are all mute as we now have Roths and many HD sources which today rightly promote that “folks should go for tax diversification.”
In a similar place age wise and will probably make some Roth conversions this year and next. Used last year’s low bracket and already a bit of this year’s to offload a couple of less tax efficient funds.
Meanwhile, absolutely relate to your introduction. We’ve been enjoying several weeks in Devon and Cornwall. Definitely a beautiful area.
Dartmoor? That place has been on my bucket list ever since I first read Hound of the Baskervilles as a young teenager in the 60s. We finally got to visit there two years ago and indeed it is beautiful.
My grandparents used to farm on Dartmoor, but they retired to a hamlet called Galmpton that’s half a mile from the coast. On the coast is a wonderful place called Hope Cove, which is where my parents had a holiday house and where we continue to go.
Thanks for mentioning. Have to reread!