Investing - IRA to Roth Conversion

Investing - IRA to Roth Conversion

This post is based on a few conceptual rules of IRAs 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.

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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 IRA 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 IRA funds to Roth funds in preparation for or in retirement. I assume that you have converted your 401k to an IRA and that you have a Roth IRA started. I know nothing specific about converting 401K or 403B to Roth versions - this post applies to IRA to Roth IRA conversions.

For the rest of the post, IRA means traditional or rollover IRA, Roth means Roth IRA.

The Advantages and Disadvantages of Conversion

The choice of IRA 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 IRA, 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 (IRA).

But the choice is not that straight forward.


At 72 or 73 you must start taking required minimum distributions (RMDs) from the IRA. 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, so now it leaves the tax advantaged realm.

Growth in an IRA 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 use any amount of the money tax free. In an IRA, use 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 IRA. 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 IRA 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 IRA to Roth conversion.

A Back Door

And a back door - if you have money in an ordinary (not tax advantaged) account and pay capital gains tax or qualified dividends tax to use the money, but can't put it in a Roth because you have no earned income, try this. Convert money from IRA to Roth but pay the taxes from the ordinary account. Now instead of having to pay income tax on the money that you convert and the money that you take out to pay the tax, you take the income tax money from the ordinary account plus enough to pay the capital gains rate on it. You end up keeping the full value of your tax advantaged accounts but some of it made tax free. And you pay for this with money from the ordinary account. So you have moved money from the ordinary account to the Roth through a back door. But how much did it cost to do that and where did the money come from and go to? An example is the only way that I can illuminate.

Let's move 10K from IRA to Roth. Let's say your tax rate is 22%, so you need to pay 2.2k in income tax. If you pay from your IRA, take out total 12.82K, now you owe 22% on 12.82k = 2.82k. Conversion complete, IRA down 12.82K, Roth up 10K, taxes paid.

Let's try it the other way. Convert 10k so 2.2k income tax. Your tax rate on the ordinary money is 15% (cap gains) so you need 2.59k and you pay .39k tax. Conversion complete, IRA down 10k, Roth up 10k, ordinary account down 2.59k, taxes paid. You have moved 2.59k of ordinary money into 2.82k IRA money. That's a 9% increase, but the IRA money costs you 7% more to withdraw. So just a 2% difference, but that 2.82k is eligible to move to your Roth.

Tax Rate on IRA Money

If IRA 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 IRA assets to Roth assets at a low tax rate. If you have assets in an ordinary account, you can set it up so that you collect only capital gains and qualified dividends. Then pay the income tax on the conversion from this ordinary account (the back door described above).

At age 72 or 73, you must start taking required minimum distributions (a percentage of the total assets) from your IRA. You can reduce these by moving the assets to a Roth before the RMDs start.


But remember that income from a conversion may bump your Medicare premium, so look at the whole picture before deciding. See Investing - Fun Retirement Tables.


If you like to contribute to charities, before or after you die, IRAs are very efficient - give them pretax money. They won't owe tax on it.

If you leave money to charities after you die, it's a waste to have already paid taxes on it.



IRA, the heir pays income tax rate (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 heir gets a free, potentially huge, capital gain (that you did not pay). So ordinary accounts have some advantages over IRAs and Roths, but that is not the subject of this post.


Not owing taxes, I expect, 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.

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