Roth Conversions: The Case for and Against Them
Have you been tempted to jump on the Roth IRA conversions bandwagon? Check out the pros and cons to see if they make sense for you.


Roth IRAs are a hot topic these days. I get multiple media inquiries every week regarding the pros and cons of Roth conversions. But while they can be a great proposition for some people, for others they just aren’t a good idea.
A little background: A Roth IRA conversion is the process of moving money directly from a pretax account, such as a traditional IRA or 401(k), to a post-tax account (Roth IRA) and paying the tax bill in that year. This strategy has picked up momentum in the last few years, thanks to today’s historically low tax environment.
I go to the grocery store a few times a week and enjoy trying new things, but there are also the staples. One of those is coffee. If I walk into Whole Foods and the Peet’s bag I normally buy for $10 is on sale for $7, I will stock up. The yellow tag below the coffee will tell me how long the sale will last. I save 30% for every bag I buy. No-brainer, right?

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The idea behind a Roth conversion is the same. You are stocking up, or pre-paying taxes today, to avoid paying them in the future. The only reason this would make sense is if you believe that your future tax rate will be higher than your current tax rate. Time horizon is not a factor, despite what you might read. It is simply a bet: current tax rate < future rate. The challenge is that there is no definitive yellow tag saying when and how much those tax rates will go up.
The case for Roth conversions: Two examples
1. You are in a tax valley.
We have a client, Jim, who has been retired for a few years. His wife, Susan, is retiring on December 31. They worked and had good incomes for full careers and are now in their mid-60s. Once Susan’s wages drop off of the 1040, their taxable income will be lower than it has been in decades. They will live off cash and taxable investments.
At age 70, they will both have turned on Social Security, and by 72, they will be taking required minimum distributions (RMDs) from their retirement accounts. All else being equal, their taxable income, and thus, their tax bracket, will pop back up. That window of opportunity is a “tax sale” from age 65-70/72, when they could pay at a lower tax rate when moving money from a traditional IRA to a Roth IRA.
2. You believe tax rates will go up.
Oh boy. People are passionate about this one! Whether it’s our ballooning debt, the upcoming election or the fact that our current tax code is set to expire on December 31, 2025, this may be a reason to pay now.
Even if nothing else changes in the next year, rates are set to go up with the expiration of the Tax Cuts and Jobs Act (TCJA). Like the previous example, this creates a sort of tax holiday for those who saw their tax bill drop thanks to the TCJA.
The case against Roth conversions: Two examples
1. You are in your peak earnings years.
Imagine the Peet’s Coffee example above. What if you walked into the store and instead of the bag costing $10, it’s $13? You would not buy that coffee until it dropped back down to a reasonable rate.
If you believe you are in your peak earnings years, on the verge of retirement, you should not convert. You will pay a premium on every dollar converted. Instead, you should be searching for deductions. You should defer your income until you can recognize it in a future, lower-tax year.
2. You are not liquid.
Let’s say you convert $100,000 from a traditional IRA to a Roth IRA and owe $25,000 in taxes for the conversion. While certain custodians will allow you to withhold those taxes and let the $75,000 grow tax-free, you typically want to have significant liquid funds to cover the tax bill from a separate pot.
The first reason for this is relatively straightforward: Tax-deferred accounts grow faster. So, if you have a choice of earning a 7% return in a taxable account or a 7% return on a Roth account, you would choose the Roth. Therefore, when figuring out which pot you want to turn over to Uncle Sam, pick the taxable.
If you’re under 59½ and use the IRA funds to pay the tax bill, you’ll also pay a 10% early withdrawal penalty on that distribution. At the end of the day, if there is not enough money on the sidelines to pay the tax bill, work on that before moving on to conversions.
Slow and steady wins the race
We save certain clients significant tax dollars by doing Roth conversions over a period of years. The caveat to all of this is that you must know what you are doing. I have seen entire IRAs converted in a single year, with almost half the value of the account going to taxes.
If you put yourself in the first category and think a Roth conversion makes sense for you, the tricky part is the calculation. You should seek the help of a CPA or CFP. Typically, we will do a tax projection for the year to estimate your taxable income. We will then figure out how much “headroom” we have, or how much income we can realize before we jump into the next income tax bracket. We will usually convert that amount over a period of several years. However, don’t forget the impact your income can have on capital gains and Medicare premiums!
Yes, Roth conversions are trendy in the small world of financial planning. And yes, for a small segment of the population, they can save big tax dollars. But ask yourself: Are you willing to write the check?
Related Content
- Are You a Baby Boomer With Too Much Cash? Three Scenarios for What to Do
- Asset Allocation for Retirees: Five Things to Consider
- Five Ways to Make Retirement a Little Less Scary
- Retired and 'Stuck' With a Mortgage Below 4%? You Have Options
- Six Essential Retirement Strategies for Baby Boomers
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
-
Cord Cutting Could Help You Save Over $10,000 in 10 Years
How cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement Rule
The '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?
If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get It
The Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning Playbook
Consider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care Solution
If you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a Recession
Recessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income Planning
Once you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around You
While thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.