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With Roth conversions touted as a savvy move—pay taxes now, enjoy tax-free withdrawals later—it’s tempting to jump in. But what if the U.S. tax system shifts from income taxes to leaning heavily on tariffs? This idea, gaining traction in 2025 policy debates, challenges conventional wisdom and suggests a contrarian take: maybe we should limit Roth conversions.
Here’s why. Converting a traditional IRA to a Roth means paying income tax upfront at today’s rates. The payoff is tax-free growth and withdrawals, ideal if your future tax rate is higher. But if income taxes are cut or replaced by tariffs—import duties that inflate the cost of goods—you could overpay. You’d owe income tax now, then face higher prices when spending Roth savings, as tariffs act like a consumption tax on purchases. It feels like double taxation: once to the IRS, then again at the store.
Tariffs, like the 10-41% rates on imports and 60% on Chinese goods in 2025, fund some tax cuts, but income taxes still dominate federal revenue. A full tariff-based system is speculative and could spark inflation or trade issues. If it happens, keeping funds in a traditional IRA might save you from overpaying taxes now, especially if future withdrawals face little or no income tax.
Still, Roths offer perks like no required minimum distributions and tax-free inheritance. If you’re in a low bracket now or expect higher income taxes later (say, if tariffs falter), partial conversions make sense. What am I going to do this year? I am going to run the numbers and convert enough to stay in my low tax bracket.
When I retired at 67, I paid for a calculator to help decide if Roth conversions made sense. I tried every possible combination of inputs and it always came out about the same if I converted or not. So, I decided to convert small amounts each year until age 72 so I would have some tax diversification to go along with my asset allocation and asset location strategies. I think predicting the future is tricky. I won’t ever know if converting was beneficial, but I guess my kids will appreciate inheriting my Roth. BTW, I have my Roth invested in emerging market and healthcare equity ETFs to maximize growth. So far, so good.
Agree with your assessment.
When I was working my income was too high to open Roth accounts. The deduction for traditional 401k contributions was beneficial. Now retired with a good sized IRA my tax bracket is way lower than when I was working. The IRA is only 27% of my investment portfolio. Converting to a Roth didn’t make sense and when I retired took my SS at full retirement age. Didn’t see the benefit of waiting until 70 and converting some of the iRA.
Solid comments all around. I’m all for strategic Roth Conversions if they fit your goals. I perform small ones annually, mainly for my beneficiary children. But I also know nothing is guaranteed, especially when politicians look into ways to grab more taxpayer dollars. It wasn’t so long ago that there was no such thing as IRMMA. I believed it was introduced in 2003. There was a time that Social Security wasn’t taxed. And I recall there were members in Congress a few years back looking at the possibility of taxing gains in ROTH accounts when distributions are withdrawn. One congressman brought up a proposal to keep the Roth “rules” for the original owner & spouse, but once it becomes an Inherited ROTH account it should be taxable. Who knows what is down the road with the taxing of ROTH accounts?
Let’s make sure Congress knows it’s political suicide to tax Roths.
You raise some good and, in my case, timely points. I am in the first year of retirement and trying to determine if Roth conversions make sense for us. We are living off traditional IRA funds until we begin to collect social security. I am reluctant to make conversions at a marginal 24% federal tax rate when I am withdrawing funds from my pre-tax accounts at an average federal rate of ~15%. I understand the advantage of Roth funds for non-spouse heirs but would argue that even surviving spouses might pay an average tax rate that is lower than rates paid to convert. We currently have about 22% of our retirement funds in Roth but I’m not sure converting more is the savvy move for us. Am I missing something?
Try this free online calculator to see if in the long run Roth conversions are good for you. Everyone’s situation is different. However, I was amazed on the results for my own situation. I will be doing conversions up to the top of the 24% bracket.
Thanks for the link. I will play around with it. Maybe the numbers will change my mind but a quick first pass has not yet convinced me.
To my knowledge, ROTH conversions have not been around long enough to confirm if they are a winning strategy. Won’t really know until we have many long term studies. Filling up low tax brackets appears to be a better than average bet, and for wealthy estate planning purposes, but otherwise, a bet at best. The pendulum is swinging back, general news has been Roth+++ until recently and now one see articles/videos tempering the Roth enthusiasm.
Without getting political, I’d be really hesitant to make any permanent decision (like Roth conversions, emigrating to Portugal, etc.) based on the current situation in Washington. Nothing is thought through, nothing seems long term, and too much is fickle. HD folks should know better.
I hear Portugal is really nice!
The first thing to remember about assets in tax deferred accounts, is that(assuming a reasonable allocation to equities) they will accomplish the goal that putting them into the account contemplated. The values will grow. The longer the time, the greater the growth. The Rule of 72 is immutable.
The second thing to remember is that, under current law, after the owner and spouse pass on, all the funds will come out of the account within ten years. (Let us not quibble about special rules for disabled children etc.) And when the funds come out the deferred tax will be collected.
This is how $1.3M at age 55 retirement in mid-2001, which declined to $1M one year after retirement can become $2M at age 65, $3.1M at 70.5, and $4.3M (despite RMDs) at age 79.
Everyone lives a different life with different circumstances. Whether Roth conversions will be an attractive strategy for you depends on your circumstances, and the financial situation of the ultimate beneficiary.
In any case, you should ask yourself who will ultimately take the funds out and pay the tax, and what will the effect be on the tax owed by the recipient?
In our situation, our very successful children will ultimately recieve 53% of these funds from Roth, and the balance from Traditional.
Agree with this approach. I’ve generally tried to be opportunistic in my approach with conversions starting about 15 years ago in my early 50s. Extrapolating future growth at the time, our tax deferred accounts looked like the RMD years could have sizable distributions without some modest conversions. We did a large conversion around 2009/2010 when one was allowed to spread the payment of tax due on the conversion over 2 years (and reverse the conversion if the market fell during that time). After that time we’ve done a combo of back door Roth conversions (after completing a reverse transfer of my TD IRA to my 401k when working). Fast forward 15 years and our Roth balances have now surpassed our tax deferred balances. I generally agree that avoiding the 24% marginal tax bracket makes sense for most, but if one has a very heavy balance in tax deferred in may be worth chipping away at those balances in some modest/moderate way. In my case i plan to do a small conversion up to the first IRMMA bracket within the 22% marginal bracket (before starting SS at 70). We are doing this with an eye on trying to keep the TD balances at a modes level for our heirs- given the 10 year and lump payout schedule for inherited IRAs.
Bottom line, I understand the contrarian view regarding conversions, but one might wake up one day 10 or 20 years from now regretting that they didn’t do some modest conversions.
One thing to contemplate is there is a good chance that your children may inherit your assets when they are in their peak earning years. If the deceased has been taking RMDs from a traditional IRA the non-spouse beneficiaries must start taking annual RMDs in the year after their death and also distribute the entire account within 10 years. This could result in a significantly higher tax rate. If the inherited funds are from a Roth there is no impact on the beneficiaries tax rate.
We have the same situation. We have been aggressively doing Roth conversions for the past 10 years. As an additional benefit our required RMDs have remained pretty steady over that time.
This is some good, common-sense points on how to think about our Roth Conversion Wagers. And I mean wager–since we are betting on several unknowns, such as tax rates, tax code structure, the mood of Congress, not to mention our own (unknowable) plethora of personal circumstances. As you state, converting in the lower (10-12%) brackets is fairly low-risk. But as rates rise, and potentially more ancillary taxes are piled on, the risk of overpaying also rises–substantially.
A Roth account is a wonderful thing to have, but take care that you don’t pay too much for it.
Interesting thought. LTC is a bit like that as well. If you convert tax deferred money and then later use it for LTC, you’d probably be better off having not converted it since using it for LTC (due to the generally high amounts needed) will be withdrawn mostly tax free. If someone uses this strategy, then I guess the desired outcome is hoping to pay increased taxes later as that means LTC wasn’t ever needed. 🙂
Excellent point but I believe the new tax law may now limits this. Think it may be based on income but is now about 6500 max. Hope I misunderstood the change.
I converted 2/3 of my ira when I retired but before taking SS. Invested Roth more aggressively. Put ira into basic cds hoping to control rmds and yet it keeps growing. Know I am lucky to have this “problem” and there’s a good chance I will need a lot of help as I get older but still happy I made the conversion when I did, and while nj taxes were deductible from federal taxes. The game keeps changing.
I’ve also done some Roth conversions and I certainly think they’re a wise move in many situations. Also I’m certainly not a tax expert so maybe one of the HD tax pro’s could weigh in and clarify it for us. That said, I believe the 6500 max you’re referring to is a deduction limit for LTC insurance premiums. I’m not aware of a deduction limit for paying for actual qualified LTC costs (other than it has to be over the 7.5% income threshold and the resulting loss of the standard deduction).
There are 37 trillion good reasons we’re unlikely to pay lower income taxes than we will this year. Debt this size is not sustainable.
For many HD readers, Roth conversions make sense; the harder question is how much to convert. It helps to think in terms of a target tax bracket and Medicare IRMAA bracket after converting, when RMDs start.
If you’re married, run the numbers a second time using the single person brackets for a future tax outlook after the first spouse dies. That can be a bit of a nasty shock for some.
One thing I was thinking about Roth conversions is the peace of mind knowing the money is yours forever and no one can take it away. I paid off my mortgage very early and people called me crazy. The peace of mind has been more than worth the float. In fact, it’s that decision when I was 42 that gives me the peace of mind to know I can retire any time I want. Maybe Roth conversions now will pay off in the same way, combined with the near guarantee of higher taxes in the future.
That’s a great way to think about it, Sal. Love the mortgage payoff analogy.
Carefully planned Roth conversions increase the long-term effective yield on your taxable savings by lowering your effective tax rate. Same for the RMD money coming from whatever remains in your traditional IRA.
For now, we are keeping some funds in our tax deferred IRA. This allows us to withdraw money each year to at least match the (recently generous) standard deductions for true tax free earnings.
We converted most of our tax-deferred account balances to Roth IRAs over several years prior to receiving Social Security and Medicare and are very happy that we did so as the accounts have significantly increased in value. We did leave some money in a traditional IRA that we plan to use for QCDs for as long as we live or until the account is empty, whichever comes first. The QCDs will be at least equal to our RMDs.
Makes good sense indeed. It helps having some savings in all three buckets (tIRA, rIRA, and taxed)
Hadn’t thought about future tax-deductible LTC expenses offsetting some or all of RMD income. We still have LTC policies but I doubt they’ll cover all those costs.
Smart. Another potential use for a bucket of tax deferred money would be some earmarked for LTC. If needed, then it’s use will be tax deductible and having as much as possible (ie. not reduced due to paying taxes during conversion) is desired. If never needed, then I’ll happily pay taxes later while being thankful I never needed it for LTC.
One of my favorite investment writers, Alan Roth, says that the 50% solution is often the best to the Roth problem…and other investment problems.
The 50 Percent Rule – Articles – Advisor Perspectives
The CBO estimates tariffs will generate about $872 billion in revenue over the fiscal years 2025-2034, less on a dynamic basis. That’s about equal to $239 million a day, The federal government currently spends $18 billion a day with already inadequate revenue.
The interest on our debt is nearly $1 trillion a year.
The income tax was enacted in 1913 because tariffs were inadequate and unstable. Nothing has changed – except we are much better at spending more than we have.
At some point responsible people in charge will be raising all taxes or we won’t be able to sell more debt.
Well reasoned, RDQ.
I recall the “peace dividend” of the late 1990s. Wasn’t that supposed to eventually lower taxes, too? Even if tariff revenues were to increase substantially, future tax cuts would seem unlikely.
interesting question. In my humble opinion, I don’t foresee tariff collections causing a decrease in tax rates. Even if tariffs increase over time we still have $37 trillion to pay back.
Maybe the unstable tariff income could be earmarked only for debt payments. But of course the politicians in Washington would just continue to find other things to spend money on. And of course tariffs are a regressive tax.