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(2026-05-31 revised)
This post is based on a few conceptual rules of traditional IRAs (TIRAs) and Roth IRAs. But don't forget the details that I have not mentioned - converting, eligibility, age, time limits, etc. And don't forget - THE RULES MAY CHANGE.
Occasionally you may see an article questioning the use of Roth IRA, Roth 401K, etc. and suggesting that 90% of us should not be using the Roth versions of retirement accounts. I do not recommend or disparage using Roth accounts to build your retirement savings. I have suggested converting your TIRA to a Roth IRA (in pieces, not all at once) when conditions make it advantageous.
Certainly Roth accounts are not the better place for some people. I have no idea what the percentage is. Roth is not generally used while working, in my experience, because people like the tax break of a pretax account. And for older people, Roth accounts were not available at work for most of their working life.
But the point of this post is to examine the value of converting TIRA funds to Roth funds in preparation for or in retirement. I assume that you have converted your 401k to an TIRA and that you have a Roth IRA started. I know nothing specific about converting 401K or 403B to Roth versions - this post applies to TIRA to Roth IRA conversions.
For the rest of the post, TIRA means traditional or rollover IRA, Roth means Roth IRA.
The Advantages and Disadvantages of Conversion
The choice of TIRA vs converted Roth starts with how much tax you pay when withdrawing money. At first look, when withdrawing small amounts, and assuming that tax rates stay the same over time, and assuming that you pay the tax on the conversion from the TIRA, it's a wash - no difference. You can pay the tax now and shrink your investment by the tax rate (Roth). Or you can wait until you need the money and pay the same tax rate on the, hopefully bigger, investment (TIRA).
But the choice is not that straight forward.
RMDs
At age 73 (currently) you must start taking required minimum distributions (RMDs) from the TIRA. Not that you will be paying more tax than if you have converted the money, but you may not need the money. It is too late to convert to Roth for the current RMD, so now it leaves the tax advantaged realm.
Growth in an TIRA vs Roth
A good stock investment will grow faster than inflation. Maybe you will pick an explosive growth stock and make a fortune. If this is in the Roth, you may withdraw any amount of money tax free. In a TIRA, withdraw too much in a year and you bump the tax bracket. Or the tax rates may go up. And the RMDs will go up because they are a percentage of the total in the TIRA. This is why I have suggested to convert risky high growth investments to a Roth before the safe stuff (bonds, CDs).
The Widow(er) Tax (2024-05-04)
If you are married, you are using the married tax table for ordinary income on TIRA withdrawals. But what happens if a spouse dies? The living spouse is suddenly single and using that tax table - way higher tax bracket for a given income. This is a good reason to push TIRA to Roth conversion.
Using a Taxable Account to Pay Tax on a Roth Conversion
If you are trying to maximize your Roth IRA, but are not allowed to contribute because you have no earned income, the only source of funding is conversions from your TIRA. But the conversion triggers ordinary income taxes. If you use the TIRA to pay the taxes (either by requesting tax withholding or by using a withdrawal) , that reduces potential Roth funds. If you can pay from a taxable account that is producing only capital gains and dividends, you are likely to pay less tax on the withdrawal than if you pay from the TIRA. So pay tax from a taxable account, end up with a bigger Roth and a smaller taxable income.
Tax Rate on TIRA Money
If TIRA withdrawals are in addition to other taxable income (pension, taxable Social Security) they will be taxed at your marginal rate, not your average tax rate.
Tax Efficient Conversions
If you encounter a significant stock market dip, and you are confident that it will come back, then converting in the dip lets you convert with less tax. I am not suggesting timing the market for short term dips or looking for absolute bottom. But in a significant, long term downturn such as the tech crash, housing loan crash, or COVID crash, it is easy to choose a point to save some taxes.
Between the ages of 62 and 70, you might decide to live off of savings and avoid taking Social Security benefits. You can use this low income period to transfer TIRA assets to Roth assets at a low tax rate. If you have assets in a taxable account, you can set it up so that you realize only capital gains and qualified dividends. Then pay the income tax on the conversion from this taxable account.
At age 73 (current law), you must start taking required minimum distributions (a percentage of the total assets) from your TIRA. You can reduce these by moving the assets to a Roth before the RMDs start.
Medicare
But remember that income from a conversion may bump your Medicare premiums (IRMAA), so look at the whole picture before deciding. See Investing - Fun Retirement Tables.
Charities
If you like to contribute to charities, TIRAs can be very efficient.
After you die, if the charity is a beneficiary, the money goes to it with no tax to your estate or the charity.
If you are over 70 1/2, you can do a Qualified Charitable Distribution (QCD) up to $100,000 per year. This is direct from TIRA to a qualified charity, no tax to you or the charity, and it counts toward your RMD.
Heirs
Remember - THE RULES MAY CHANGE.
TIRA, the heir pays income tax rate on withdrawals (because you didn't pay it).
Roth, the heir pays no tax (because you already paid it).
Ordinary account, the cost basis resets to the value at death - so the money is tax free at that point. Your heirs get a free, potentially huge, capital gain (that you did not pay for). So ordinary accounts have some advantages over TIRAs and Roths, but that is not the subject of this post.
Psychology
Not owing taxes, I think, is somewhat like not having debt - one less headache to deal with. You will still have to file a return and pay taxes, but a lot less after converting to Roth.
