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IN RECENT YEARS, I’ve confronted a choice: I could fund my solo Roth 401(k)—or I could use the dollars to cover the tax bill on a large Roth conversion. I wish I could do both. But after using my earned income to pay living expenses and make financial gifts, I don’t have the necessary cash.
My choice: Go for the big Roth conversion.
Why? In part, it’s because I’m focused on shrinking my traditional IRA before I turn age 75 and have to start taking required minimum distributions (RMDs), which could push me into a much higher federal income-tax bracket. I’m especially focused on doing so in 2024 and 2025.
In early 2026, I’ll turn age 63, which means thereafter any Roth conversions have the potential to trigger the Medicare premium surcharge known as IRMAA, or income-related monthly adjustment amount, which is based on your income from two years earlier. On top of that, it’s possible federal income-tax rates will climb in 2026, assuming the individual tax cuts included in 2017’s Tax Cuts and Jobs Act are allowed to sunset.
But there’s an added reason to favor Roth conversions over contributing to my solo Roth 401(k). Suppose I have $24,000 in spare cash. I could stash that $24,000 in my solo Roth 401(k), which is appealing.
But it isn’t as appealing as using the $24,000 to cover the federal income-tax bill on a $100,000 Roth conversion. This assumes I’m in the 24% federal income-tax bracket. In other words, a Roth conversion gives me more bang for my buck, allowing me to get a bigger chunk of money growing tax-free, plus it means smaller tax bills down the road because it shrinks my traditional IRA.
My plan is to leave my Roth accounts to my two children. One is likely to be in at least as high a tax bracket as me, so it makes sense for me to pay my IRA’s tax bill instead. In fact, I may tweak the beneficiaries on my Roth and traditional IRAs, leaving more of my traditional IRA to the child in the lower tax bracket.
There’s also some possibility that I’ll tap my Roth accounts for my own use—if, for instance, I have a year with surprisingly high expenses and pulling yet more money from my traditional IRA would push me into a much higher tax bracket. On the other hand, from a tax perspective, my traditional IRA could also come in handy, notably for charitable giving and if I have a year with high deductible medical costs that I could offset against a traditional IRA withdrawal.
What if—unlike me—you’re fully retired and don’t have any earned income, and hence you don’t face the choice of either funding a Roth or converting part of your traditional IRA to a Roth? If you have taxable-account money to cover the conversion tax bill, it may still be worth making a big conversion.
Before you go ahead, there’s all manner of considerations, including the rate at which the conversion will be taxed, your projected tax bracket once you begin RMDs, and the potential impact on your IRMAA premium surcharges and on the taxation of your Social Security benefit. If you intend to bequeath your Roth accounts, you might also ponder your tax rate compared to that of your beneficiaries. In addition, you should consider whether you can pay the conversion tax bill without triggering additional taxes because, say, you’d have to sell highly appreciated stock to generate the cash needed to cover estimated taxes.
But as with my annual choice, keep in mind the leverage involved—that every $1,000 in extra income taxes paid will allow you to get many multiples of that sum shifted out of your traditional IRA and into a Roth, where it’ll then grow tax-free. Moreover, this maneuver has a little-appreciated advantage: By using taxable-account money to cover the tax bill on a Roth conversion, you thereafter avoid the tax bill on that taxable-account money.
Suppose you have $10,000 in a high-yield savings account that’s earning 5% in annual interest, or $500 a year. If you use that $10,000 to pay the conversion tax bill, not only will you move a big chunk of money into a tax-free account, but also you’ll no longer have that $500 a year in taxable interest.
Indeed, by using that $10,000 to pay the tax bill on a Roth conversion, it’s like you’re shifting the $10,000 into your Roth, where it will then grow tax-free. The tax savings from shrinking your taxable account is the reason it’s worth undertaking Roth conversions, even if you think your tax bracket in future will be similar to what it is today.
For those with greater wealth, there’s an added incentive to “prepay” the income taxes owed on their traditional retirement accounts: The net result is to reduce the size of your taxable estate. That could mean not only a smaller federal estate-tax bill—not a problem for the vast majority of families—but also less in state inheritance and estate taxes, which are an issue in a third of states, including where I live.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney, on Facebook and on Threads, and check out his earlier articles.
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This wonderful 2024 article and many excellent comments about the thinking in choosing to convert traditional IRA to a Roth IRA has a little dust on it. I wonder if this topic might be one of the 20 articles that Jonathan has said he has recycled in his volume of work.
In addition to decision factors previously discussed we can add that we are now in a investment period with high volatility and possible major tax rule changes starting in 2026.
If the world equity market index fund I hold drops in 2025 by an extreme percentage (maybe 10% more than my marginal tax rate, think 32%) then I will likely make a opportunistic Roth in kind conversion in 2025 if such a threshold is reached.
If such a market drop does not occur I will likely wait until late in 2025 to see what the tax landscape looks like starting in 2026. My expectation is that congress will put off any such tax changes until at least Boxing day (Friday 12/26/2025). I have marked this day on my calendar to take any needed action, if any, before the end of this year.
The only tax action I have taken so far related to 2025 is that I will have sufficient tax paid in and withheld to provide us protection from under payment penalty based on our prior year (2024) tax regardless of any course of action I may take later in 2025.
Does anyone have additional Roth conversion criteria to consider specific to 2025?
I would hope that you are taking into account the time value of money. If paying taxes bothers you so much it might be better to pay the taxes little by little over the next decade until the time you are required to take out those tax deferred $ from IRAs and tax deferred 401Ks. Take out a measured amount from tax deferred account(s) on a yearly basis so you reduce the amount you have at the commencement of your RMD withdrawal period while at the same time not taking out too much each year that you jump into a higher tax bracket. The IRS likes your strategy I’m sure but it would seem to be better to defer paying those taxes as long as you are able.
I find your reference to the time value of money puzzling. Do you appreciate that it can be more valuable to have a smaller sum growing tax-free than it is to have a somewhat larger sum growing in taxable and tax-deferred accounts?
I find it puzzling that you would want to pay a sum of taxes upfront rather than over a period of years to allow tax deferred funds to grow over time. You say that you are worried about being pushed into an income level where your medicare tax is higher. In your column you say that you are worried about taking RMDs which could put you into a higher tax bracket. Most people have the majority of their funds in tax deferred accounts because it allows them to save more than investing in something like a Roth. From your response it appears that you must have a relatively high % of your retirement funds in taxable and Roth accounts. I appreciate that it can be more valuable to have a smaller sum growing tax-free than it is to have a somewhat larger sum growing in taxable and tax-deferred accounts, but only if your mix of tax deferred vs tax-free and taxable is relatively even. Most people try to invest as much as they can over time and the best way to do that is to use tax deferred accounts whenever possible.
If converting to a Roth and paying taxes now results in greater after-tax wealth down the road, which is the case for me and many others, why wouldn’t folks do so?
I did lots of calculations and what-ifs. Eventually, I went with the easiest that made the most sense. Convert annually until RMD up to the max of the lowest MAGI. For a couple, it’s $206K.
When you have money, you will pay more, I rather have this “problem” than not 🙂
I “bit the bullet” in 2020 and 2021, making $100,000 Roth Conversions in both years, and paying @$24,000 each time. The result is today, 58% of my portfolio is Tax Free, 30% is Tax Deferred, and 12% is Taxable.
The RMDs I have been required to take in the last 2 years were taken as QCDs. In 2024 I am retired and I was able to fund two final Roth contributions from my final paycheck, earned in 2023 but received in 2024, along with a pay out for my accrued PTO.
One thing is certain, making the Roth Conversion decision is not a simple one. For most it will probably make sense, but there is value in having some qualified dollars in your portfolio later in life, should you incur Long Term Care expenses.
Great Article Jonathan.