A Roth IRA Conversion Is Probably A Waste Of Time And Money For Most

To contribute to a Roth IRA in 2023, single tax filers must have a modified adjusted gross income (MAGI) of $153,000 or less, up from $144,000 in 2022. If you make $138,000 or less, you can contribute the full maximum to a Roth IRA.

However, if married and filing jointly, your joint MAGI must be under $228,000 in 2023 (up from $214,000 in 2022). If married couple makes $218,000 or less, they can contribute the full maximum to a Roth IRA.

For those who have a traditional IRA and are now making over $153,000/$2228,000, you can currently do a backdoor Roth IRA conversion. You pay taxes upfront so you don't have to pay taxes upon withdrawal.

As a reminder, you can contribute a maximum of $6,500 to a traditional IRA tax-free in 2023. You can deduct the contribution from your current income, which lowers your current federal tax bill. Upon withdrawal, you must pay taxes based on a future unknown income tax rate.

For a Roth IRA, you contribute after-tax money. The money and all future gains are tax-free upon withdrawal. This article discusses why a Roth IRA conversion is probably a waste of time and money for most people.

Why You May Still Not Want To Do A Roth IRA Conversion

When deciding on a Roth IRA conversion the key variable to solve for is your tax rate. If your tax rate is the same when you are contributing to a traditional IRA and when you retire, there is no saving.

Below are the latest federal income tax brackets and rates for single filers, married couples, and heads of households.

2023 tax rates

Let’s say you are 40 years old and make $65,000 a year. This income level puts you in the 22% marginal federal income tax bracket.

If you invest $6,000 in a traditional IRA and it grows at 8% a year for 20 years, you will end up with $27,965. When you withdraw the money, you decide to withdraw all of it and pay the same 22% marginal federal income tax. Therefore, you end up with $21,813.

On the other hand, if you contribute to a Roth IRA, you have to pay 22% tax on that $6,000 upfront, leaving you with $4,680. If it grows at 8% a year for 20 years, at age 60 you can withdraw, tax-free $21,813. In other words, the results are the same.

If the tax rate is the same, here is the equation that proves contributing to a traditional or Roth IRA is a wash.

Y = A * B.  Re-arrange to A = Y / B.  Or Y = A * B is equal to Y = B * A.  

Forecasting Future Tax Rates Is Key For Roth IRA Contribution

Some may argue that tax rates must go up in the future to pay for all our deficit-spending today. However, when I first wrote the classic post, Disadvantages Of A Roth IRA: Not All Is What It Seems, eight years ago, people were arguing the same thing. Then Donald Trump came into office and lowered tax rates under the Tax Cuts And Jobs Act.

Therefore, nobody can be sure what tax rates will be in the future. But what we should feel confident about is NOT seeing tax rates go higher for the middle class. Politicians will always depend on the middle class to stay in power. Therefore, politicians will unlikely hurt the middle class through higher taxes.

There are many ways to define the middle class. Given we are talking about income tax rates to determine a Roth IRA conversion, one commonly acceptable middle-class definition is the median household income up to + 50%.

The Middle Class Will Unlikely Be Paying Higher Taxes In Retirement

The current median household income is about $75,000. Therefore, the middle-class definition for the country is income up to about $112,500.

Given politicians also have to account for millions of people living in higher cost of living areas as well, a middle-class income can also be adjusted higher.

For example, a family of four in San Francisco is considered “low income” if it earns $117,000 or less. Therefore, in my opinion, a middle-class definition may be considered earning up to $300,000 in the SF Bay Area.

In other words, it is highly unlikely tax rates for those earning up to $300,000 inflation-adjusted, will ever be raised. In fact, President Biden has stated he will not raise taxes for anyone earning less than $400,000. Therefore, $300,000 seems to be a conservative income cut-off point for facing future tax increases.

That said, please be aware the tax cuts implemented by the Tax Cut and Jobs Act will expire on December 31, 2025. Therefore, for those of you in the lower marginal tax bracket, shifting some assets to a tax-now Roth IRA can make sense.

Historical marginal income tax rates for highest and lowest income earners

Your Income Will Likely Be Lower In Retirement Than While Working

We've made the argument that household income up to $300,000 will likely not face tax hikes. Now let's argue why our incomes will likely be lower in retirement. Lower incomes in retirement also correlate with lower tax rates.

On the face of it, arguing your income will likely be lower in retirement than while working makes sense. After all, by definition, you're not working in retirement! Most of your income will come from Social Security, a pension if you're lucky, and investments.

Of course, the modern-day retiree often works on side hustles that keep them busy. Therefore, there could certainly be some extra active income coming in.

But for the most part, most retirees will just live off what they've saved and what the government and maybe their company have promised them. In a low interest rate environment, generating more investment income is more difficult.

Retiree Example #1: The Luckiest Ones

Let's say you're lucky enough to amass $1 million in your IRA at age 67. I write “lucky” because only ~12% of Americans have $1 million or more saved for retirement, according to a 2020 TD Ameritrade Survey. Who knows the exact percentage, but we can be certain that only a small minority have seven-figure retirement accounts. That said, I firmly believe the majority of FS readers will be millionaires in retirement.

At age 67, you're also eligible to collect the maximum Social Security benefit of $3,011. This amount comes out to $36,132 a year and will go up with inflation. Yet another lucky break, even though you contributed to the system for many years.

How much should you withdraw from your traditional IRA to fund your retirement lifestyle? You plan to live a comfortable lifestyle until age 90. Therefore, you decide that withdrawing at a 4% rate sounds good. You can always adjust the withdrawal rate in the future.

Your total income is now $76,132, $36,132 from Social Security + $40,000 from your traditional IRA. A $76,132 income squarely puts you in the middle class, the Safe Zone where income taxes won't go up!

Not All Your Income Is Taxable

However, $76,132 isn't your taxable income. Let's say the standard deduction of $12,550 per individual and $25,100 per married couple, inflation-adjusted, still exists when you are retired. If so, your maximum taxable income is $63,582.

Further, did you know that your Social Security income isn't fully taxed? The portion of your Social Security benefits subject to taxation varies with income level. You’ll be taxed on:

  • up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.
  • up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple). 

In other words, even if you are one of the lucky retirees with a $1 million traditional IRA and who can collect the maximum Social Security benefit, your tax rate still likely won't go up. In fact, it may actually decrease.

For the vast majority with lower incomes, they almost certainly won't be facing a higher income tax bracket in retirement.

Retiree Example #2: The Lottery Winner

Roth IRAs are most valuable for those with top 1% net worths and top 1% incomes IN retirement. Roth IRAs are also a valuable tool for tax planning for those dealing with a big estate, because the heirs can draw the money tax-free.

The issue is, how many of us will retire in the top 1%? Only 1% or less.

Let's say you're a lucky individual making $700,000 a year. You're in the top marginal federal income tax bracket and are concerned about paying a 39.6% marginal federal income tax rate in retirement versus 37% currently.

Therefore, you decide to do a Roth IRA conversion and pay a 37% rate upfront on the pre-tax contributions you made when you were only in the 22% marginal income tax bracket years ago.

Yikes! This Roth IRA conversion locks in a 15% loss with the potential for only saving 2.6% in federal income taxes in the future.

Top 1% Net Worth Composition Breakdown

After 20 more years of making at least $700,000 a year, you amass a fortune of $15 million. Out of the $15 million, $5 million is in a Roth IRA conversion, $5 million is in after-tax brokerage accounts, $3 million is in your primary residence, and $2 million is in rental properties.

Hooray for having a top 1% net worth, which currently has a minimum net worth cut off of $10 million.

You could only have achieved this net worth by consistently saving 50% of your after-tax earnings and investing the difference. Only a minority of people have such a high saving rate. Therefore, you were really “only” living off about $200,000 a year.

In retirement, your $5 million in after-tax brokerage accounts is generating $100,000 a year in dividends. While your $2 million in rental properties is generating about $80,000 a year in taxable income. Your total investment income is about $180,000 a year.

Saving rate by income / wealth class

Raising Spending From $200,000 to $300,000

Given life is short, you decide to target ~$300,000 a year in gross spending, or 50% more than during your 20 years of work. Therefore, you decide to withdraw $120,000 a year, or 2.4% from your Roth IRA each year. Your total income is closer to $336,000 thanks to also being eligible for Social Security.

For tax simplicity's sake, your $336,000 in total retirement income faces a maximum marginal federal income tax rate of 35%, which is still lower than the 39.6% when you did the Roth IRA conversion.

You would need to withdraw closer to $200,000 from your Roth IRA to potentially start paying the same marginal federal income tax rate. But can you really comfortably spend double what you've been used to spending for the past 20 years? Doubtful.

Again, to get to a $336,000 annual retirement income requires you to get to a $15 million net worth. Not possible for more than 99% of the population. Please be realistic with your expectations.

For a quick calculation, take whatever you are making now and divide it by 3% and 4%. The result is your likely liquid net worth target necessary to be able to generate a similar level of income in retirement. If you have a similar level of income in retirement, your tax bill likely won't increase.

Making Up For My Lack Of Roth IRA Contribution

Despite highlighting how doing a Roth IRA conversion likely won't save you money, I still regret not contributing to a Roth IRA when I was in school and during my first year of work. But I can't be blamed too badly for my lack of contribution because it only became a savings option to the public in 1998, when I was a junior at William & Mary.

The last thing I was thinking about junior year was saving for retirement. All I wanted was to get a job and prove that going to college was worth it. By the time I understood the merits of contributing to a Roth IRA, my income had surpassed the income limit to be able to contribute.

Therefore, I'm making up for my mistake by contributing to a custodial Roth IRA for my kids. Thanks to the standard deduction and their low wage, they'll essentially get to earn tax-free money to be able to contribute to a Roth IRA. I recommend doing the same for your low-income earning kids.

Contribute to a Roth IRA when you can. Even if you just have $20,000 in a Roth IRA, it will grow to over $200,000 in 30 years if it compounds at 8%. If you can invest in a moonshot that becomes the next Facebook, then it's obviously worth investing your Roth IRA money if you can.

Still Not Doing A Roth IRA Conversion Today

But in terms of doing a Roth IRA conversion now, I still can't succumb. It feels like one last trap the government is setting to get Americans to fork over even more money. Further, my tax bracket is too high.

All of us have the ability to adjust our income, and therefore, our tax rates in retirement by:

  • Moving to a more tax-efficient state
  • Rebalancing our portfolios to non-dividend-paying investments
  • Donating more of our wealth to charity while living
  • Gifting more of our wealth to our children and other individuals
  • Investing in new non-income producing investments
  • Starting a business
  • Withdrawing at different rates

As soon as you do a Roth IRA conversion, it's like surrendering to the government. Sure, you'll get the tax-free benefits upon withdrawal. But even that is not a certainty. The government could always pass new legislation.

The irony about eliminating the Roth IRA conversion is that Congress might actually save thousands of Americans lots of tax dollars. The headlines about how one man was able to earn a 100,000X return on his Roth IRA is unlikely going to happen for most Americans.

If you must do a Roth IRA conversion, make sure you run various scenarios. The “worst” case scenario is if you end up making more in retirement than while working. If so feel extremely blessed! Paying more in taxes because you failed to do a conversion isn't that big of a deal.

Psychologically, you can think about paying more taxes than you could have as a contribution to society. This goes for both a traditional and Roth IRA. Just don't think about all the waste and corruption.

The Best Time To Do A Roth IRA Conversion

In retrospect, the best time to do a Roth IRA conversion for me was in 2013. 2013 was my lowest income year because it was the first full year I didn't have a job. I stopped receiving a steady paycheck by June 2012.

Unfortunately or fortunately, even unemployed, I was still in the 28% marginal federal income tax bracket ($87K-183K for individuals) at the time because tax rates were higher then. Further, I was earning passive investment income, some online income, and had deferred investment income as part of my severance package coming in for the next four years.

Paying six-figures in taxes to do a Roth IRA conversion wasn't enticing when my income was still way down. Therefore, I decided to just roll over my 401k into a traditional IRA. Psychologically, you will probably also feel like holding onto as much wealth as possible if you lose your job.

Therefore, the best time to do a Roth IRA conversion is when you are unemployed with little-to-no other income sources and there's a bear market. At a 0%, 10%, or even 12% marginal income tax bracket, you should probably find the time to convert. There may not have a better opportunity in the future.

For most people, the best time to do a Roth conversion is after you retire, are in a lower tax bracket, but before claiming Social Security benefits.

Further, Roth IRAs aren’t subject to Required Minimum Distributions at age 72, unlike traditional IRAs and 401(k)s. This comes in handy if you want to pass on your Roth IRA to someone else.

Related: Rolling Over Leftover 529 Funds Into A Roth IRA

Making The Right Choice In Terms Of Probabilities

Here are my estimated probabilities for a positive outcome if you do a Roth IRA conversion at your current marginal federal income tax bracket. A positive outcome is defined as saving money on taxes.

  • 10% tax bracket: 95% chance contributing or converting to a Roth IRA is the right choice
  • 12% tax bracket: 90% chance contributing or converting to a Roth IRA is the right choice
  • 22% tax bracket: 70% chance contributing or converting to a Roth IRA is the right choice
  • 24% tax bracket: 60% chance contributing or converting to a Roth IRA is the right choice
  • 32% tax bracket: 40% chance contributing or converting to a Roth IRA is the right choice
  • 35% tax bracket: 30% chance contributing or converting to a Roth IRA is the right choice
  • 37% tax bracket: 20% chance contributing or converting to a Roth IRA is the right choice
  • 39.6% tax bracket: 10% chance contributing or converting to a Roth IRA is the right choice

If you make less than $125,000 as an individual or less than $198,000 as a married couple, you can contribute the maximum $6,000 to a Roth IRA. Paying a 24% marginal federal income tax rate is reasonable. You'll likely come out ahead with a more diversified retirement income source.

But for those of you in the 32%, 35%, or 37% tax bracket, a Roth IRA conversion is likely going to end up costing you more tax dollars. The break-even tax rate is somewhere around 26% – 28% where converting or not won't make a big difference.

Diversifying retirement income sources is great. However, always run different scenarios in this uncertain world. There's a good chance what you think will happen will never happen.

Roth IRA Conversion Recap

  • Forecasting your retirement tax rate is the key variable
  • Tax rates are unlikely to go up for the middle class (up to ~$300K income)
  • You will likely make less in retirement than while working
  • Contribute to a Roth IRA when you can
  • For your highly speculative investments, make them in a Roth IRA if possible
  • You have more ways to lower your taxable income in retirement than you think
  • If you find yourself unemployed or underemployed, consider a Roth IRA conversion, even thought it will feel painful
  • Even if you end up paying more in taxes in retirement, feel grateful you did so well
  • So long as you are maxing out a a tax-advantaged retirement account that is the most important thing

Manage Your Money Wisely

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Related posts:

How Much You Should Have Saved In Your 401k By Age

Recommended 529 Plan Amounts By Age: A Roth IRA Alternative

Use A 529 Plan For Generational Wealth Transfer Purposes

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105 thoughts on “A Roth IRA Conversion Is Probably A Waste Of Time And Money For Most”

  1. Sam,

    Hi; haven’t spoken to yu in ahwile (with questions/comments (smile)); hope all is still going GREAT with yu..

    I just read above (all had to say about doing conv); and as always, what yu’ve stated does make sense; BUUUT, one thing that wasn’t factored in, in that that ‘Sample 1’ was Folks like me who are Lucky to have a Pension; and so in ‘this’ situation, how do yu feel??; would yu be ‘still’ against doing that ‘Conversion’..

    As I was now planning to do one for ‘this’ yr 2023 (so have been reading up on all, to try educate myself)..
    My Curr Sal is -> $97,916..
    I’m ;allowed’ to ConTrib to Two (2) DeFerred; which the company does NOT ‘match’; so this yr, my ConTrib will be $60G; so will bring down my Gross to $37,916..
    Then, being ‘single’, my Tax ‘Credit’ will be 13G; so my TAXABLE Gross would be roughly -> 25G..
    So ‘THIS’ was the reason ‘why’ I said to myself, -> ‘now’/this yr, would be a GOOD Time, to do a 100G ConVersion!!!; simply because, -> In ReTIREMent, my Income is gonna be:-
    1. Pension of 58G ann (60% of 97,916)
    2. SoCial SeCurity of 3G mth (at age 67)
    3. 401/457K draw down of 40G ann (since will have the 1mill)..
    This is for a Total of roughly 135G ann..

    So hence why, I was determined to start DOING this ConVersion now; effected from THIS YR 2023..

    So reading now what yu’ve written above; I now don’t know what to do???

    AND, 2ndly, -> (from the InFo I just furnished above; would yu per chance be able to give me a ‘rough’ idea of about HOW MUCH TAxes would be due to Pay UpFRONT???; as I doN’T have a Clue??
    (to ConVert 100G)..
    I’m in New York STATE (the MOST ExPensive/TIEFing State (LOL))!!!!

    Thanks, Thanks MUCH Sam..
    Appreciate your Views/Opinion as always..

    Deb; Bronx, NY
    (middle class; ‘trying’)..

  2. Hi, Just listened to this podcast episode (& scanned through many of the Comments)…what appears to be missing is Roth Conversion in “gap years” between ending employment (& entering lower/middle tax bracket from higher tax bracket during full-time employment) & RMD’s @ age 72 that will force income back into higher tax brackets.

    1. Excellent point, which I need to include in this post. I had that down year when I left my job in 2012 and I didn’t do a conversion. But 2012 wouldn’t have been a good year because I got a large severance check. So maybe 2013. But then maybe 2013 wouldn’t have been a good year because my income started to rise and I didn’t wanna pay a lot of taxes upfront when I had no steady day job income.

      So it can be tricky! The last thing you want to do when you don’t have a steady day job is to pay more taxes upfront. It’s hard to part with that money. Psychological.

  3. Michael Biasatti

    Hey there FS. Just finished your book, well done. I don’t understand the concept of a company giving a huge severance package to an exiting employee. Granted I don’t work in the ivory office towers of big business or the finance world but riddle me this (because I really do want to understand).

    Example A – a company in downsizing and letting people go. Clean break. Your last day is X and thank you for your service. Company no longer has the payroll/bonus obligation toward that employee.

    Example B – The employee is planning on quitting on their own accord and as such will no longer provide income producing work for the company. Resignation accepted. Company no longer has an payroll/bonus obligation toward that employee.

    Why would a company in either situation afford either employee the opportunity to negotiate a multi year package of pay when in either case the company will no longer have the ability to generate revenue from that employee ???

    It’s a great victory, I just simply don’t understand. Thanks. Really enjoy your content.

    1. I’m glad you enjoyed the book! Your thinking is totally understandable. Most people cannot conceive of why a company would offer a severance package.

      The key is understanding the other Sides needs. If you give your two week notice, you leave your manager and your employees in a lurch. Further, if a manager is tasked with letting employees go, it is one of the hardest things any person can do.

      So by thinking about how you can provide a seamless transition so that your manager doesn’t have to spend 3 to 6 months hiring your replacement and then training your replacement for several months to get up to par, or saving your manager the heartache of letting someone go, you learn how to create a win-win scenario in exchange for a severance package.

      Here are some relevant posts for you to consider.




      I also wrote a book about how to negotiate a severance if you’re interested. It is in its fifth edition and the overwhelming feedback from readers has been positive. Most cannot believe what they were able to get.

      Finally, if you don’t mind leaving a great review on Amazon for Buy This, Not That, I would appreciate it! It is the best gift for an author who did their best to add value.



  4. Sam, I think you left out an important scenario. For those of us with employment-based pre-tax 401K and already maxing it out, any traditional IRA contribution is after tax anyway. I still do the after tax contribution and immediately convert to a Roth. That way I am paying the tax I need to pay anyway now, but get the tax free treatment on gains at withdraw. I think the same argument goes for after tax account and Roth 401K (the mega-both) route, with the assumption of maxing out pre-tax 401K first. Do you agree or am I missing something?

    1. I think that’s the point, whether a conversion should be done anyway or not. It depends on how wealthy do you think you’ll be in retirement and what the tax rate will be.

      I don’t know you’re specifics, so I can’t tell you. But I think the logic in this post is sound. More people will make more money while working than while retired.

      1. I think Karen is raising an important point that is not addressed or clarified by this article. The main argument above is whether to convert from a traditional IRA to a Roth IRA, the decision of which is centered around a person’s marginal tax rate now versus when in retirement.

        However, if that person is eligible to contribute to a workplace retirement plan like a 401K and earns income over the max allowed ($78K in 2022), then they cannot deduct any of their traditional IRA contributions, the above arguments in the article are moot.

        In this scenario, the decision then becomes whether to contribute after-tax dollars to a traditional IRA or convert it to a Roth IRA: there is no difference on how contributions are taxed up front. However, with the contributions converted to a Roth IRA, the gains will be tax free, and there are no RMDs compared to a traditional IRA. In this scenario then, it seems like the best decision is to do the conversion. The real question – again in this scenario only – is whether to put this money into an IRA/Roth IRA to start with, for these reduced benefits. Some would say yes because you’re still getting tax-free gains, and you’re forcing yourself to save into a retirement vehicle. But others think the tax-free savings on the gains aren’t worth restricting one’s investing of $6K a year.

  5. I think you are ignoring the RMD schedule for traditional IRAs. You are not free to take out as much as you want each year. If you have $5M in your IRA you need to take out over $500K when in your 90s.

    1. In context of people who would like to retire earlier than 67, the RMD concern at 72 (and potentially moving to 75) is not a big one. Only people with very large balances will face RMDs larger than they want to take. And they enjoyed the tax deferral for a very long time – pay up already.

      In the early 60s, Roth money can be very useful for keeping your taxable income in the first two tax brackets, making LTCGs and dividends tax free. Married couples stay in this up to 106k. Supplement with 50k in Roth and that lets you spend closer to 160k per year, while letting the traditional IRAs build.

      This is also a potential incentive to take Social Security early. Even if you live beyond the break even point in the early 80s, your IRA can be expected to gain more than the value of your higher SS benefits that may or may not exist in your 90s.

      The other potential benefit to call comes even if tax rates stay unchanged.

  6. Money Ronin

    I just want to add that the other best time to do a Roth IRA conversion is when the market crashes. I’ve had a few opportunities including March 2020 but when the market is crashing, I’m usually too distracted to think about Roth IRA conversions.

    I had bigger fish to fry. In this last round, I was focused on accumulating a cash reserve for all the lost rents from the eviction moratoriums.

    1. For sure, when the market crashes or when you lose your job. The mass layoffs are coming. It’s just hard to pay taxes upfront after losing your job and money in your investments.

  7. Dunning freaking kruger

    I posted previously with some tax errors. But I wanted to post again with some hypothetical numbers.

    Our household is in the 24% tax bracket. We have substantial pensions that will provide around 140,000 yearly starting in 4 years. We are 51. The decision maker and I will both have topped out social security. We have 10 year old children. Our planning revolves around their futures.

    House will be paid for in less than 4 years and we have low 7 figures in tax sheltered accounts. 25% is in ROTH accounts now. We are doing 80,000 ROTH conversions yearly for at least the next 5 years.

    It is easier to make these conversions during our earning years because it is ingrained in our lifestyle. End result is an easy transition to our kids and tax free growth.

    ROTH conversions are simple. It will
    Make retirement less complicated with most of our investments in ROTH.

    Conversions look most advantageous anywhere from teens to mid 60s. Personally, We have been doing them since age 48.


    Rate of return of 10% over 40 years. $19,500 invested every year. Age 22-62. Payroll, conversion, Pretax comparison.

    End account value $8,630,554 on ROTH accounts.

    22%: 19500/.78 = 25,000. 5500 (40) = 220,000 total cost.

    24%: 19500/.76 = 25,567. 6157 (40) = 246,280 total cost.

    32%: 19500/.68 = 28,676. 9176 (40) = 367,040 total cost.

    22%: 19,500 x .22 = 4290 (40) = 171,600 total cost.

    24%: 19,500 x .24 = 4680 (40) = 187,200 total cost.

    32%: 19,500 x .32 = 6240 (40) = 249,600 total cost.

    Buying power is 8,630,554 across all examples in ROTH.

    12%: 8,630,554 x .12 = 1,035,660 lien.
    12% buying power = 7,594,894

    22%: 8,630,554 x .22 = 1,898,721 lien
    22% buying power 6,731,833

    24%: 8,630,554 x .24 = 2,071,332 lien
    24% buying power 6,559,222

    Heirs have to draw down the entire 8,630,554 in 10 years and pay tax on all withdrawals.

    Comparing to both payroll funding and keeping all pretax the numbers for conversion are appealing.

    To each their own.

  8. How the tax incurred from Roth conversion should be funded for optimal result?
    a – from an after tax brokerage account
    b – directly from the source Pre-tax IRA account

    1. Dunning freaking kruger

      Best source of advice would be a tax professional.

      Our family pays for conversion tax from cash we keep on hand. We dont want to pull it from the conversion. It dilutes the long term benefit.

  9. I was under the impression the amount you could contribute to an IRA was limited by earned income.

    Our family’s plan is to match, and invest in index funds, our kids’ income dollar-for-dollar in custodial Roth IRAs until they’re earning “real” post-college salaries at which point they can take over. That should give them in the neighborhood of $15-20K that can then continue compounding for another 40+ years.

    1. How does your 5 year old have $6K in earned income? I was under the impression the amount you could contribute to an IRA was limited by earned income.

      Our family’s plan is to match, and invest in index funds, our kids’ income dollar-for-dollar in custodial Roth IRAs until they’re earning “real” post-college salaries at which point they can take over. That should give them in the neighborhood of $15-20K that can then continue compounding for another 40+ years.

  10. Paper Tiger

    For those of you with corporate 401K plans with after-tax contributions saved in the plan, this might be something to consider. I recently rolled a corporate 401K from my employer plan into a self-directed IRA through Fidelity. Since Fidelity managed the 401K for my company, one phone call to Fidelity was able to process this in about 15-20 minutes.

    Fidelity reminded me that I had ~$160K in after-tax contributions and wanted to know if I wanted to open a Roth account and roll that money there, which is what I did. The pre-tax money went into a Traditional IRA and the post-tax went to a Roth. If Biden is going to change or limit this in 2022, now is the time to consider this for yourselves. Between my wife and me, I have 2 other corporate 401Ks that I am probably going to follow the same process.

    1. It is unlikely Biden is going to change this. What you did is not a Roth conversion. You did what the IRS and your accountant call an “in-service distribution”.
      The key is that the status of your money you moved doesn’t change. The portion of your money that was after-tax in your company’s regular 401-k keeps its after-tax status when rolled over to your Roth. There is no tax consequence for what you did since no conversion of that money occurred and its tax status didn’t change.
      By contrast, the portion of your money that was pre-tax in your 401-k does become taxable as regular income when you convert it to a Roth.
      Most individuals have only pre-tax money in their regular 401-k accounts, but diligent savers can accumulate after-tax money. It is worth checking your 401-k account to see. Many 401-k administrators don’t notify you of this status, except when you request a conversion. You can also do a rollover of the after-tax portion only, and leave intact in the 401-k the pre-tax portion. Check with your admin.

  11. One tax reduction strategy when doing a Traditional to Roth conversion is factoring in businesses losses. If you own an LLC or an S-Corp and have suffered losses in a taxable year, it might be a good time to do a conversion. Since LLCs and S-Corps are pass-through entities, business taxes are reported on your 1040 form. If you have business losses, it would just be subtracted from your gross income.

    I personally went through this in 2019. I converted $32K from Traditional to Roth. So that increased my overall income by $32K. The increase generated a $6K tax liability and my wife was freaking out! HA!

    In that same year, my S-Corp had taken a $26K loss. in the end, the $26K was subtracted from the $32K. So in the end I only ended up paying about $1,400 in income tax.

    It’s helpful to know how each line is calculated on the 1040 form. Now, I’ve left out a lot of details in the calculations, but I hope you get the general tactic. My tax returns are prepared by a CPA and I do review what he does.

    Needless to say my eyes were opened once I figured this out.

    1. Fascinating! Thanks for the tip. Unfortunately or fortunately, online media is a high margin business when it’s just you and your wife.

      Your wife has an eagle eye for taxes!

  12. Frederick collins jr.

    You are wrong when the best time is for a conversion .

    The BEST time is when you have little or no income AND the market has taken a major drop !
    If you can beat that then let me know .

  13. Financial Samurai,

    I’ve wondered for some time now your view on self directed IRA and 401K accounts. My wife and I have one of each, and while there are certainly some administrative hassles and rules to abide by, we’re able to invest in private equity deals, venture capital deals, funds, notes, gold, Bitcoin, etc. which opens a whole universe of possibilities vs. standard IRA options. Real estate is an option as well, although because of the great tax benefits real estate offers, to me it never made sense to buy RE in a tax advantaged account where the tax advantages are sort of “wasted”.

    We took a hodgepodge of old 401K, pensions and other similar accounts, rolled them together, and put all the money into these self directed accounts several years ago. So far, so good.

    Have you written prior posts on use of self directed IRAs? If so, would be interested to read those.


  14. Dunning freaking kruger

    Well they don’t call me Dunning Kruger for nothing!

    To start, we have custodial ROTH IRAs opened 2 years ago prior to FS recommending such a move. I was on my game!

    Furthermore, we have conducted back door ROTH IRA moves for 2 years.

    Lastly, we do ROTH conversions yearly from Pretax 457b To ROTH 457b. We are Continuing with conversions but remaining in the 24% bracket. Congress appears to be excluding much higher income earners over the next 10
    Years. But not definite.

    Why are we doing this? A few reasons.

    1. We will have pension income that will keep us in the 22% to 24% (or equivalent) tax bracket indefinitely. We will also have social security. It won’t take much of a withdrawal or RMD to escalate our tax brackets at age 72.

    2. Based on historical performance we anticipate having multiple millions in tax deferred accounts by the time our kids are adults. We have over 1 mm now and are on track for 1 mm in ROTH accounts in 5 years. Forecasting to age 72 the RMDs are going to be painful on the TDAs. We are 51 now. We are trying to minimize that.

    3. ROTH accounts are the easiest way to pass wealth to kids. We are earmarking most of those accounts to pass down.

    4. Psychological trickery. If we are going to fully fund tax sheltered accounts anyways, then do it as ROTH. By hitting the same dollar figure you are really investing more because there is no tax lien. Yes, high income earners mathematically are better off in TDAs, but during your earning years with excess cash it’s easier fund these accounts. If you have the cash anyways why wouldn’t you deploy it inside tax free growth. It’s better than post tax brokerage accounts unless you need bridge accounts, which we do not.

    5. The best choice in our state (AZ) and tax bracket (24%) are conversions. Our family engages in ROTH conversions yearly. It saves 7.65% across the board. It actually saves more, which will be illustrated shortly.

    • The beauty – if you convert $10,000 and are in the 24% bracket in AZ, you will pay around 22.5% tax all in or $2,250 (10,000 x .225).
    • You do not pay the 7.65% tax for social security and medicare on the conversion. It is never recaptured.
    • If you invested the money via ROTH payroll contribution you will be paying around 30.15% on your money. You will have to earn $14,285 to get to $10,000 in the ROTH portion. (10,000/.70 = $14,285).
    • A ROTH conversion of $10,000 saves you $2,035 in tax compared to payroll contributions ($4,285 – $2,250 = $2,035).
    • You just put $10,000 in a ROTH account for $2,035 less expense. Again this is in AZ and the 24% bracket.


    Employee B is in the 24% tax bracket.
    Employee B invests the yearly max via payroll deduction in the ROTH portion of the Nationwide 457(b).
    $19,500 invested.
    24% tax bracket is really around 30% tax including social security and medicare.
    $27,857 total income needed to get to $19,500 in ROTH portion ($19,500 / .70 = $27,857).
    $8,357 paid in tax ($27,857 – $19,500 = $8,357).
    Tax bill to put $19,500 into ROTH portion via payroll is $8,357.

    Employee C is in the 24% tax bracket.
    Employee C invests the yearly pretax max in their Nationwide 457(b).
    $19,500 invested.
    Employee C does a conversion of their pretax contribution the next year of $19,500.
    24% tax bracket is an effective rate of around 18.5% federal, 22.5% with state tax added.
    No social security and medicare tax of 7.65% on conversion.
    $19,500 x .225 = $4,387 in tax.
    Tax bill to put $19,500 into ROTH portion via conversion is $4,387.
    A savings of $3,970 compared to payroll. $8,357 – $4,387 = $3,970

    No tax bill is due on ROTH accounts for qualified withdrawals. Tax free for life. ROTH accounts passed to heirs have no tax bill other than 10 year tax free draw down.


    If effective tax rates are the same (like 22.5 %) and you have a choice between pretax or payroll tax to put a hypothetical $10,000 into any investment, you always chose pretax and then pay the tax during conversion.

    Why? You hit your $10,000 via pretax with no tax drag. You have the full benefit on each dollar. If you choose payroll tax you have to pay 22.5% on every dollar.


    Pretax contribution of $10,000 x .225 = $2,250.
    You owe $2,250 on $10,000

    Payroll contribution of $10,000 / .775 = $12,903
    You have to earn $12,903 to get $10,000 into the account at a 22.5% effective tax rate.
    Payroll income of $12,903 x .225 = $2,903.
    $12,903 – $2,903 = $10,000

    The difference is $2,903-$2,250 = $653 difference on the same $10,000 and the same tax rate of 22.5%.

    Lastly, a lot of what makes a person successful investing is the consistent action of Investing, not Necessarily the best theoretical approach. Donut consistently Over time. In my feeble
    Mind, I find it hard to swallow that by keeping everything in pretax accounts I will
    Be investing for the government. I find value in paying them off and keeping out of my account.

    Often people speculate that the ROTH accounts will be changed and taxed back end. That is not reality. It is speculation or someone can see into the future. If someone can tell Me what year that will happen, they can probably tell me who will win the Super Bowl and other neat stuff. Sign me up!

    Ultimately, we will Be about 50/50 between ROTH and TDA.

    I think this works for us in our state and in our tax bracket. And we are consistent.

    Be well Financial Samurai!

    1. Someone is on the ball! Good work. Being on the ball is probably more than half the battle. Winging it is generally not a good strategy for achieving financial security. Too many leaky holes.

      1. Dunning freaking kruger

        Many thanks esteemed Financial Samurai.

        We like pretax and ROTH for flexibility. But we really like ROTH for our situation. I bet Peter Thiel does too! Well played. That stinker generated a lot of scrutiny for ROTH accounts.

        “Be formless….shapeless….like water. You put water into a cup, it becomes the cup. You put water into a bottle, it becomes the bottle. You put it into a teapot, it becomes the teapot. Now water can flow…..or it can crash. Be water my friend!”

        Bruce Lee
        September 1971

        So like the Man and the Myth said, we will be flexible, like water.

        Dunning freaking Kruger

        1. I’m not a CPA, so take this with a grain of salt because it could be wrong, but I believe Medicare & Social Security taxes are assessed on both Roth & Traditional contributions on the front end – in the form of FICA taxes.

          Considering this was a large factor in your comparative analysis it may be beneficial to double check with your tax professional. In either case, let us know what you find out as we are all trying to be as efficient as possible with our tax liabilities.

          Thanks & Good Luck.

          Just A Guy

        2. You mention you have kids. Would you fund college savings e.g. 529’s before making Roth contributions? I’m 51 as well. Wife and I are in peak earning years so we are always maxing our tax sheltered retirement accounts. After that, we focus on 529s as they are the next big hurdle before we get out of the rat race.

    2. I’m not a CPA, so take this with a grain of salt because I may be wrong, but I believe Medicare & Social Security taxes are assessed on both Roth & Traditional contributions on the front end. In the form of a FICA tax.


      Quote from above link:

      “If you sign up for a traditional 401(k) plan, your employer deducts your contributions from your paycheck. As an added perk, your taxable income is reduced by the amount of your contributions.

      However, you still pay Social Security and Medicare tax, also known as FICA, on your full pay.”

      Considering that was a big factor in your comparison analysis I would double check with your tax professional. I would be interested in what you find out, as we all are trying to be as efficient as possible with our tax liabilities. Thanks for the post & good luck.

      – Just a guy

      1. Dunning freaking kruger

        Thank you I screwed something up again. We’ll I prove yet again why I’m called Dunning Kruger.

        Per IRS.gov:

        Although elective deferrals are not treated as current income for federal income tax purposes, they are included as wages subject to Social Security (FICA), Medicare, and federal unemployment taxes (FUTA).

        However, you are still saving noticeable taxes by doing conversions. Recalibrated Max contribution example at 22.5% effective tax rate in AZ (24%) bracket –

        19,500 / .775 = $25,161 in compensation to put 19,500 into ROTH account.

        25,161 – 19,500 = 5,661 in tax via payroll.

        19,500 x .225 = 4,387 in tax on conversion.

        5,661 – 4,387 = $1,274 in tax savings via conversion based on same tax rate and contribution.

    3. RMDs are really not that bad for taxes for 98%+ of folks. A $1 million 401k or Roth’s RMD at 72 is $40k and only $52k at 80. At 72, if that’s your only income, your effective tax rate on that is less than 4%. You’d need over $450k in RMD’s to have a 24% effective tax rate, which would be $8-10MM needed in an IRA or 401k, which is going to be a very small subset of people. Where Roth’s are handy is really if you expect to have a lot of non-tax sheltered income in retirement or you are going to inherit a fortune and pay a lot of taxes on those gains. For the vast majority of folks, better off taking the highest marginal tax today.

      Plus, the rules of Roth’s can always change – just like Democrats are already starting to go over folks with $10m+ in a Roth, that could easily be lowered down the road and you get zero tax benefit (and negative tax benefit the way they are doing it now forcing a huge distribution all in one year taxable). The further you are from 60-70 years old, the more you need to adjust the Roth advantage for the risk that it may not actually be tax free. I put that risk at 1 in 3 for my age (late 30s)

      1. All excellent points. The real catch is when one spouse dies and the newly single individual now has the same RMD. Their taxes will go up substantially. The widows tax trap is a really big deal.

  15. Excellent commentary. This got me thinking about my family’s situation. It may be a useful example of a circumstance when a Roth conversion might make sense.

    I retired last year, and this year should qualify to be a real estate professional. We have a fair amount of accumulated real estate losses, and a few million in tax-deferred IRAs and 401ks (and no Roth IRAs). As my income this year (age 68) will be low, would this be a good time to do a Roth conversion, using the real estate losses to offset the increased taxes from the conversion?

    1. Dunning freaking kruger

      You have to be meticulous on tax ramifications with conversions once you are in Medicare.

      Ed Slott and some other well known credentialed tax people have quite a few articles detailing the complexity of the issue. You need a super duper CPA to figure that out.

      It’s like math plus voodoo tax stuff plus unforeseen IRS.gov trickery that can derail things.

      Get a CPA with gray hair and bifocals. Not one that posts on tiktok with skinny jeans.

  16. My income is $250K, which is middle class at best in Northern CA.
    Have an IRA worth $20 million from 30 years of saving and sound investing.
    Proposed IRA legislation would trigger 50% RMD for IRAs over $10 million if income exceeds $400K.
    I was planning on selling house, and moving after retiring, which would generate capital gains easily surpassing the $400K and trigger a $5 million IRA RMD.
    This seems punitive, in fact draconian; am I missing something?

    1. I’m not sure as less than half a percent of the population will have this problem.

      But there might be a chance that you are not spending enough money or giving enough of it away due to a $20 million IRA. Given you make $200,000 a year, you are most likely living off less than $150,000 a year. Therefore, at the very least, I would spend 100% of your day job income every month on something, since your Roth IRA will cover over 100 years of living expenses.

      Congrats on the huge returns! What is it that you do that keeps you working despite your investment gains?

      1. Interesting comments, Mr. Samurai. I agree, kind of. Without getting too metaphysical, my two lessons from life are 1) Working (a respectful job) is always better than not working. Experiencing two periods of unemployment for me was very stressful, not only financially, but more so psychologically, and 2) Spending a lot of money doesn’t make me feel good for very long. In fact the most rewarding things I do don’t cost any money, i.e. a new PR on my bike, a good tennis match, or the first scent of the cool ocean breeze on a hot smoggy day.

        That being said, I have no desire to give 55% of my earnings to an insatiable Leviathan.

        1. What is it that you do? And what are your thoughts on the alternative of giving the money to those more in need than the government?

          Personally, I will be giving all my money away above the estate tax threshold before I die. It definitely doesn’t feel good to pay the death tax when I could use the money to help someone directly while living.

    2. It would be great to share your success in accumulating $20m in 401K as annual contribution is less than $20K and most companies match 5-10%. in addition, most of the employers only offer mutual funds as options so many of us could benefit form your wisdom and investment success.


  17. I agree with all your points but there is advantage to be taken of back door roth contributions when you make above the threshold to allow traditional IRA contributions deduction. You basically take your after tax money (6k a year), contribute to traditional IRA, immediately convert to roth IRA. This has no tax consequences of the conversion because your traditional IRA was not tax deductible. And now you have 6k in the roth IRA that can appreciate tax free. If I’m missing something please let me know.

    1. This is what I do. The problem is it doesn’t move the overall retirement savings needle much. Better than nothing though.

      1. Agreed, better than nothing.

        But for our children, who have nothing or close to nothing, it makes a big difference. Imagine contributing $6000 a year from age 5 until age 22 when they graduate from college. It’s a great leg up!

        1. I’ve done this for my daughter. Not the full 6k though. At 21 she has 30k in her Roth. A very nice leg up!

      2. the “mega backdoor roth” that some 401k plans support allows for considerably more money, and without the bookkeeping hardships if you have existing traditional IRAs.

        You make the after tax contribution to your 401k and immediately convert it to roth. And depending on how much of a company match you have, you can do it for nearly 40k, on top of the existing 20,500 limit.

        Alas, it too is on the chopping block in the tax bill, and you won’t find any populist concerns about people who contribute even more money to their 401k each year. But aside from the liquidity knock, it’s a slam dunk choice over putting money into a taxable account.

        Being in CA, I’ll give up the mega for the restoration of 40k in SALT deductions.

  18. FIRE walk with me

    Following up on Ryan’s question, I’ve been contributing money to an after-tax traditional IRA for years (I make too much for a Roth or pre-tax IRA). Wouldn’t it make sense to convert the after-tax contributions to a Roth via the back-door before this option goes away? Thanks

  19. I am sure you have heard of the Roth Conversion Ladder. I assume you didn’t include it since it is only for people retiring before 59.5 which is a very small percentage of the population. But I would wager it affects a lot of your readers.

  20. I believe the mega backdoor Roth 401k conversion makes sense after you have already maxed out your pre-tax 401k contributions. 401k contributions above 19,500 (or 26,000 for 50 and above) will be made after-tax and can be immediately converted to a Roth 401k so there should be no gains to recognize during the conversion. Since this is funded using after-tax money, I do believe this strategy is better than placing your after-tax money first in a regular brokerage acct since you are shielding your investment gains forever in the Roth. Not all 401k plans offer this in-plan conversion though, but there are ways around that. Your total 401k contributions of pre-tax + post-tax + employer match + employer profit sharing cannot exceed 58,000 (or 64,500 age 50 or above) this year. I recently learned about this mega backdoor conversion option this year and wish I had known sooner because I think it is a great way to save after tax. Unfortunately they are proposing to shut this down EOY so I will be keeping a close eye on this topic. Naturally, this is a strategy to save after tax money once you have funded all the pre-tax contributions that you are eligible to fund. Once you retire, you can then convert the Roth 401k to a Roth IRA to avoid RMD’s. This is separate from your regular pre-tax 401k account balance.

    1. Marty Pulido

      I agree that this is a valid strategy, after you’ve depleted other tax-advantaged options. You’d be paying tax on the extra income anyway, so why not have it receive some tax advantage? There are some alternatives to consider (i.e. 529’s if you have kids), but this is not a bad approach. The conversion here is not “pre-tax” to “post-tax” but rather “post-tax” to “post-tax returns advantaged.” The only other downside I can consider in doing this depends on the investment options of your 401(k) plan. To Sam’s point, you want to make your most speculative investments within an IRA, and some 401(k)’s aren’t structured to have such flexibility.

    2. Denise, I agree that after-tax Roth conversions in qualified plans makes sense after the $19,500 pre-tax is satisfied. The tax-free future gains trump longterm capital gains, and allow for portfolio rebalances without creating taxable events. Unfortunately, very few 401(k)s offer this feature, so not many can truly capitalize on it.

  21. My thoughts mirror yours exactly. And my tax guy agrees. Doesn’t make sense to do a back door Roth for most. I have very low spending for my income and no real need/desire to increase it.
    For my kids however I’ve started with the oldest with the small amount she makes. Put it all in a Roth and I take the moonshot approach. Small amount compared to what she’ll likely inherit so why not go for the gusto. When my other kids get old enough I’ll do the same.
    As mentioned by a reply above the considerations are actually quite complex. My analysis was simplistic but my accountant didn’t dismiss it out of hand like I did. I’d discuss it with a professional based upon your expectations. Small amount of money to pay for a professional analysis.

  22. Most interesting article, and responses. I am in that age-interval between penalty-free access and full retirement. My Roth IRA has a fairly substantial balance and I have found it to be a very useful alternative to an “emergency fund”. It performs with the market, more or less, so it’s a great alternative to fixed-income taxable accounts, which are about as good as a savings account. We have covered purchase of a business, bridged the gap when monthly salaries were not earned due to other life events, now I understand how it will help manage our tax burden in future years. Fortunately I funded it over time, so no lump sum tax payment is anticipated, but I’d certainly consider it if I hadn’t already, since I really don’t retire until mandatory distributions come knocking.

  23. This was an interesting post but misses several important other tax considerations for those with moderate net worths. I’m 71 so this is my last chance to do anything before RMD’s become required.

    Net Investment tax on over 250K – 3.8% over modified adjusted gross income over 200K single or 250K for all interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. So RMD’s can increase the tax rates on all of these passive income streams.

    IRMAA – From the Medicare.gov site:
    The standard Part B premium amount in 2021 is $148.50. Most people pay the standard Part B premium amount. If your modified adjusted gross income as reported on your IRS tax return from 2 years ago is above a certain amount, you’ll pay the standard premium amount and an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium.
    If your yearly income in 2019 (for what you pay in 2021) was You pay each month (in 2021)
    File individual tax return File joint tax return File married & separate tax return
    $88,000 or less $176,000 or less $88,000 or less $148.50
    above $88,000 up to $111,000 above $176,000 up to $222,000 Not applicable $207.90
    above $111,000 up to $138,000 above $222,000 up to $276,000 Not applicable $297.00
    above $138,000 up to $165,000 above $276,000 up to $330,000 Not applicable $386.10
    above $165,000 and less than $500,000 above $330,000 and less than $750,000 above $88,000 and less than $412,000 $475.20
    $500,000 or above $750,000 and above $412,000 and above $504.90

    Estate tax: Current limits are quite liberal (over 11 MM per person) but the likelihood of a reduction to 3 to 5 MM per person is very high with the Democratic proposals on a federal basis plus state estate taxes. This is 40% federal plus individual state rates. This could be a real killer since your heirs would still be paying their own income tax on monies coming out of an inherited IRA. Getting ahead of this tax ‘bomb’ can be dramatic in certain situations.

    State tax: If you can do a Roth conversion in a no income tax state vs a high income tax state, it’s really a big deal

    Bottom line – it’s more complicated. The best time to do conversions is between when you retire and when start Medicare where the IRMAA factor comes into play.

    1. Thanks for your thoughts and feedback.

      Can you provide some numbers based on your own figures and what tax rate you’ll be paying to convert? It would also be helpful to know what your net worth an estimated retirement income and day job income is. This way, it becomes more clear. Thanks

      1. Income this yr – married filing jointly
        Social Security 51K
        Pension 7K
        Dividends and Interest 15K
        RMD’s on 2.5 MM is about 100K
        Total 173K

        Total NW about 10 MM – but much of it is still in LTCG in concentrated positions.
        With the RMDs, we are right at the initial lower limit of IRMAA which would add $2400 if we go over 176K – but that is every year with the constantly increasing RMDs with age. But if you go over an MAGI of 276K, then it would add 7200 to yearly IRMAA and over 330K leads to almost 11,000 in extra payments for a married couple.
        Net investment tax over 250K adds an extra 3.8%. I have a large amount of LTCG which would easily push me into that range if I try to reduce concentrated positions.

        I have spent the last several years doing Roth Conversions and trying to reduce concentrated stock positions but the tax complications remain.

        I remain undecided if doing a further Roth conversion this year makes sense. I would not go above the 24% tax bracket so my flexibility is more limited. My state tax is 6% as well. However, if I was not taking Social Security nor paying extra for Medicare IRMAA, the math would be very favorable to do conversions after retirement but before Medicare.

        My point is that it remains a complicated problem – advantageous if you have a good amount in an IRA but with the flexibility to do the conversions in a low income year(s) instead of paying the extra IRMAA every year forever with the limitations related to the Net Investment tax in taking LTCG on an ongoing basis as well.

        The estate tax is the joker in the deck with the current proposals for reductions in the exemption. This could be a huge factor since if you pay the tax now, it reduces the size of the estate and avaids the double taxation of estate taxes and then income taxes to heirs.

        Overall, clearly good problems to have but would still like to make the best/optimal decisions.

        1. We are on a similar footing, but an earlier stage in retirement. My spouse is 58, I’m 50, and his pre-tax accounts are already at $2M. Even if it doesn’t continue to grow, the RMDs at 72 will be quite large, and can affect everything from the IRMAA (or healthcare subsidies for the early retired), capital gains/dividend income, etc. Factor in my retirement accounts and it can us push up through the tax brackets quickly. Better to have the flexibility in retirement to manage the amount of taxable income. Thank god most of the rental income presently is sheltered bc of depreciation.

          2021 is the first year of my early retirement without any W2 income, and same with my spouse. We are going to convert as much as possible without also killing off the healthcare subsidies and keeping to a 12% bracket.

          A ROTH conversion never made sense when we were in the highest brackets as W2 employees.

          One thing I’m wondering about is whether to have my spouse take social security at 62 simply because it would spread out the income more evenly than to have a higher amount at 67 which would push us up through the brackets. The SS payments will be lower at 62, but then again you get the 5 years of payments, plus lower taxes on those payments. I would then see where our financial picture is we when I’m eligible to decide on collecting at 62 or 67.

          The more we run the calculations, it argues for never taking a W2 position again but to find fulfillment (and income) in a business where there’s more flexibility in the deductions/sheltering of income. Strange how the tax code continues to create such disincentives to work a W2 job — which really comes into play when you become financially independent. The only benefit of a W2 I can see if the ease of getting a mortgage or refinance.

  24. Jaded American

    I completely disagree with the tax probabilities. In general, the middle class has fallen into the trap of where it has the means to pay increased taxes and lacks the political power to stop it. At the same time, the middle class can’t just ship its wealth to the flavor-of-the-year tax haven.

    Taxes only go in one direction: UP

    1. Can you highlight your probabilities And what tax rates you expect for what income, if possible?

      And given your beliefs, are you doing a Roth IRA conversion?

      What marginal tax rate are you paying now? And what marginal tax rate do you plan to pay in retirement?

    2. Taxes on middle class Americans have been dropping for decades – Reagan, Bush 2, Obama and Trump all cut middle class taxes.

      60% of Americans paid no taxes or got a paycheck from Uncle sam last year. The next 10% paid about 2% of the total share of the pie. That’s down from 30% of the share for that group collectively 50 years ago and that covers all the middle class.

      Can you provide an example of a couple with zero to two kids in 1977 vs today (inflation adjusted) that makes say $100k today (+50% above median) that would pay more in taxes today than then?


    3. Well yes. It’s a good bet that, at least for the next few decades, taxes have nowhere to go but up, so that has to be factored in, even though we can’t have accurate numbers.

      Oddly, I think it makes pre-tax 401k type plans more valuable in that they can be converted into Roths.

      Because the higher taxes go, the more valuable it makes Roths.

      We will have a 13 year window between retirement and RMDs where I intend to make the most of Roth conversions. There is, of course, little to no benefit in converting after RMDs begin (you can’t convert the RMD money, you have to take that, and it’s already driving up your income tax) unless you still expect taxes to go up a whole lot more.

      Keep in mind that an equivalent amount of money in a Roth is worth much more than money in a pre-tax retirement plan, and even a considerably bit more than money in a non-retirement fund or account. The fact that Roths are not subject to RMDs just clenches it.

      Get some spreadsheets, do the math, and make informed decisions. No one else will do it for you unless, maybe, you have your own full-time dedicated staff assigned to to exactly that.

    4. It was worse in the 1970s when tax brackets, exemptions, and deductions were not indexed for inflation.

  25. What about the tax consequences of leaving a large amount (2 million) of 401K money to your children? Whoever inherits the money only has 10 years to withdraw the money. And it counts as taxable income. A child would have to add that to his/her own income, pushing up their tax bracket, maybe by a lot. Wouldn’t that be one reason to prefer the Roth?

      1. Of course that’s a good point. It’s actually kind of hard to spend more. And I’m worried about their financial future.

  26. I’ve got an additional problem with a ROTH conversion. I have comingled post and pre tax money in an IRA and so does my wife. And this is from 30 years ago, no idea how much was one and how much the other and apparently the custodian doesn’t track that. So to convert I have to pay tax twice on some of my money.

  27. Uncle Pennybags

    What is your take on After-Tax 401k? Some employers allow those and then it is possible it convert to Roth as megabackdoor. Since you’ve already paid the taxes regardless, isn’t the tax free growth a no brainer?

  28. Well I don’t necessarily disagree with most of the content in this post, it is a disservice do not address marginal versus effective tax. You seem to only be comparing marginal tax rate during earning years to marginal tax rate in retirement.

    Being in the 32% tax bracket today, during your earning (contribution) years, is not the same as being in the 32% marginal bracket in retirement (during your withdrawal years). Due to the progressive tax system ones effective taxes rate on withdrawals is always lower than their marginal rate.

    For this reason, contributing today in a traditional account trumps a Roth by a wide margin, even if you expect to be in the same marginal bracket come retirement.

    1. Do you think I should write a post explaining marginal versus effective tax rate? I am under the assumption most people understand this and I’ve used the word marginal tax rate many times in the post with a marginal tax bracket chart and probabilities at the end.

      But perhaps perhaps there is still confusion and I really need to provide more examples or dumb it down further?

      What did you end up doing with your $300,000 cash out refinance at 3%?

      1. Teacher Linda

        As a teacher, I try to teach to the lowest common denominator to not leave any kid behind. So if Debt Ninja can’t understand what you’re writing, then you are losing him as a reader.

      2. I think you’re probably misleading with this line in particular…

        >When you withdraw the money, you decide to withdraw all of it and pay the same 22% marginal federal income tax.

        The effective tax rate you withdraw at will likely not be the same as the marginal rate when you’re contributing or converting. It will be lower unless you’re pulling a lot of capital gains and have a pension on top of social security, and are choosing to earn much more in retirement than you ever earned while working.

        If you google “roth sucks” the top ranked blog post summarizes this issue pretty well. It’s aimed at the early retirement crowd, but the principles are applicable for a traditional retirement as well.

        1. Hi Mark, I am making this assumption in my example. Everyone is free to make their own assumptions and examples to highlight a point.

          So I can’t be wrong, because this is my example. Feel free to highlight your own example as well. Because I think examples help illustrate points. Did you do a Roth IRA conversion? Or have you been contributing to a Roth IRA?

      3. I don’t think an entire post needs to be made about effective vs marginal tax rates. I certainly know that you know the difference well. Which is why it seemed odd to me there was no reference to them when considering wether or not one should/shouldn’t convert traditional to Roth. Seems like a very important thing one should consider, in my opinion, much more than important than considering marginal in working years to marginal in retirement, when the effective tax is the most important thing to consider.

        As for the cash out refi: It was $225k at 3%. when rates dropped further I refi’d again at 2.5% and paid back $100k of it. Invested the remaining $125k in VOO which was the right move. Would have been better to invest all of the $225k originally borrowed, but damn risk fear lead me not to. Oh well, can’t complain.

        1. Sounds good. I thought I was pretty clear with my examples, but maybe not clear enough for some.

          Do you mind providing an example with income and marginal tax rates to hammer home your point? I think it’ll be a great way to help others who may not be clear as well.

          Best of luck in investing in the stock market with a cash out refinance. If you’re still young, I guess it’s OK to swing for the fences.

          Where are you and your financial journey anyway? Helps to get some perspective on where you are coming from. Thx

  29. Great post as always, Sam! What kicks my butt with the new tax laws is how they’re taking away any ability to do back door Roth contributions. As much of a lack of retirement savings problem as we have in this country, it seems crazy to make it more difficult! Typical government to punish those trying to help themselves and not just look for a handout…

  30. You haven’t even mentioned the impact that RMDs will have in your later years. Those required minimum distributions will eat your lunch at ages 72 till whenever if all you have is a traditional IRA and after-tax savings. Having some money in a Roth IRA is worth considering from the RMD angle alone.

    1. Sure. Which is why I do recommend contributing to a Roth IRA when you can. But doing a conversion is a different matter.

      And when you say eat your lunch, could you provide an example to illustrate? Thanks

      1. Have you done projections using the Uniform Lifetime Table distribution period and your current rollover IRA amounts? IRA balance divided by distribution period equals RMD. If you were 72 by the end of 2021, you’d have to divide your IRA balance by 25.6. In my case, that would be a hefty amount that I really wouldn’t need to live on based on planning to take social security at age 70 plus my pension plus other income streams. So I’m converting a small amount each year until I start Medicare; small enough that it doesn’t push me into the next tax bracket. My goal is to equalize the values of my rollover and Roth IRAs to give me withdrawal flexibility and minimize my RMDs without costing me higher taxes now.

  31. Great post! Highly relevant as well, as I just elected to convert some of my wife’s old IRAs to Roth this year.

    We are solidly in the 24% federal bracket, and see us moving into the 32% range within a few years, so I figured small conversions while staying in the 24% marginal bracket are acceptable.

    Further, we’ve just found the funds to payoff our home (closing is in a few months) and have no other debts, and on top of that were getting a bit heavy in cash allocation so it seemed worthwhile to shore up our pretax/Roth mix.

    I agree that it’s likely not worth it for most people to do Roth conversions, but I also like to hedge my bets. After this recent conversion we’ll be about 40% Roth / 60% pretax in retirement accounts and our eligibility is fairly limited going forward to add to Roth other than conversions. I figure having some Roth assets at least gives some flexibility in managing taxable income in retirement. I also don’t feel good about predicting the future, so somewhere in the ‘middle’ makes most sense. I also doubt our retirement assets will be more than 1/3 of our total nest egg excluding our home by the time we actually retire, so the majority of our assets will be in aftertax investments anyway.

    Interesting post, and every year I seem to have a different opinion on it.

  32. Great article! I was wondering what all the hoopla about Roth IRA conversions law change was, and I super excited we both came to the same conclusion. Very detailed analysis, and actually put math and great examples to what I was thinking.

    I agree Roth IRA conversions only work for people who have low incomes for a unforeseen reason (unemployment, disability), and you have to have the money to pay the taxes the next year.

    1. Thanks. I hope more people run the numbers and provide examples for a why they think the way they do.

      So far, the people commenting who are for a Roth IRA conversion have not provided some numbers as to why.

      We can always dream about making so much money in retirement that we will be in a higher tax bracket. But the reality is, it’s not the case for the vast majority of people.

      1. Hi Sam,

        Curious what numbers you want us to provide. I commented in response to another pro-Roth conversion comment below, and while we didn’t provide numbers I’m not sure they are really warranted. In essence, for individuals that make too much money to claim a tax deduction for traditional IRAs and have already maxed out their other methods of pre-tax contributions (e.g., 401ks), the rest of their money they invest is already post-tax. Therefore, contributing some of that post-tax income to an IRA, then converting to Roth, would be more beneficial than just investing that money in a brokerage account because you would owe no tax on the gains in the Roth, as opposed to the brokerage account where you would owe taxes on gains.

        No numbers are really necessary in the above example because it is self-explanatory that tax-free gains are more beneficial than taxable gains. However, because you asked, I’ll do a quick example. Let’s say Elizabeth graduates from law school this year and takes a job with a big law firm in New York with a starting salary of 200k. She has never set up an IRA previously (Roth or traditional). She is above the limit to contribute to a Roth IRA, and also above the limit where she can deduct her contributions to a traditional IRA. She maxes out her 401k contributions for the year (19.5k) and has plenty left over to invest, so she puts 6k after-tax into an IRA and immediately converts to Roth. 35 years later when she reaches retirement age, that money is now worth 88k if it made 8%, and her 82k gains are tax free. If she had just invested the same money in her brokerage account, those gains would be taxable and worth 70k (assuming a 20% capital gains tax).

        Perhaps I am missing something here though, so please let me know if I am. Are there other pre-tax investment options available to Elizabeth that she is missing? If not, are there other reasons that the Roth conversion is a bad idea?

        I admit my example is rather particular, although it probably applies to a lot of law school grads that are lucky enough to get jobs at big firms right out of law school. The same example could also apply to someone who started at a lower salary but has worked their way up to exceed the limits, but has never previously contributed to an IRA and only has now discovered the error of their ways.

        Much of your analysis seems to assume that the individuals already have an existing traditional IRA, and I don’t disagree with that analysis for the most part. Although even if Elizabeth did have an existing traditional IRA, depending on the size of that IRA she may still want to do a conversion if she predicts that her salary will remain above the respective traditional and Roth limits for the foreseeable future, because many years of the ability to invest post-tax income into a tax-free growth account vs. a taxable growth account may still be worth it. This is a more complicated and situation-specific analysis, but I’d be happy to come up with some hypos there too.

        1. Paper Tiger

          RD, I think the bigger discussion and debate is around backdoor conversions of older Traditional IRAs with higher balances and not the example you gave. Your example probably doesn’t spark a ton of disagreement since it is only an annual 6K investment and conversion in the example you used.

  33. In your example at the article beginning, you would have 22% more in tax free funds to withdraw, or $27,965, if you paid the 22%/$1,320 in taxes from outside the account at time of contribution/conversion from traditional to Roth.

    This is based on the assumption you can pay the tax upfront so you’d need to run the modeling of that $1320 in an after tax account to compare: $1320 in 20 year at 8%, = $6152. At the same 22% tax rate, you have ~ $4800 after tax to be added to the $21,813 in after tax from the $6k traditional for a total of $26,612 against the $27,965 in the Roth.

    One may argue ~5% more isn’t much more but considering it didn’t cost anything than the time to make the conversion year after year…that’s been my basis for maintaining the conversion each year.

  34. The other thing to consider is how much total you’ll save. Even if you have much lower taxes in retirement, and you played your Roth hand just right, what if the total savings turns out to be like $10K? Potentially not worth it for the hassle (not to mention stress and hand-wringing). That might even be true for $100K savings, for some people.

  35. Roy David Farhi

    Still like to know why you don’t discuss Dividend investing more often here Sam. A good, one million dollar portfolio could average 4.5-7.5% realistically. Now obviously growth stocks like FB, Amazon and Microsoft would bring that type of portfolio down but lets just say Prudential, Coke, Pepsi, ATT, etc. you are bringing in roughly 65,000 a year without hitting principal at all. Add that to Social Security for a FRA individual and there is another 36K in wages. And maybe that individual enjoys his 20% discount working at Whole Foods in retirement and makes another 1500-1800 or so per month. Is this such a myopic view of living the best life in retirement? Perhaps that individual even has a 2 million dollar portfolio and the numbers equal way more than 150K a year existence.

  36. Anyone who is having to do a Roth IRA conversion, is also over the deductible limit for traditional IRAs as well – so then all present and future IRA deposits would be post-tax. When considering non-deductible deposits, isn’t there no real upside in keeping the funds in a traditional IRA versus converting to Roth IRA then?

  37. Isn’t a Roth IRA conversion for the $6000 a year worth it? I contribute $6000 to a traditional IRA each year and get a tax deduction for it. As soon as the money enters the traditional IRA, I convert it to a Roth so that there is no growth in the traditional IRA. I convert it immediately. Therefore, for that year, I have deducted $6000, and going forward, the money grows tax-free in the Roth. Perhaps I am missing something.

    1. Yes, if you are in the tax bracket that still enables you to contribute to a traditional, converting to a Roth IRA is probably OK if you have a change of heart. At least I don’t think it will hurt in the long run.

    2. Not sure what you posted works how you explain it. If you make under the income limit to take a tax deduction on the $6,000 contribution to a traditional IRA, then you can just make it directly to a Roth IRA. Also, if you do make that $6K contribution to the traditional IRA and take a tax deduction, you then have to pay taxes on the conversion to a Roth, because you haven’t paid taxes yet. So there would be no reason to take the deduction. What you are describing is a back door Roth conversion, where you make too much to contribute to a Roth directly. You contribute $6K to a traditional IRA but you do not take a tax deduction for the contribution. You then immediately convert that to a Roth IRA and pay no additional tax, as the initial contribution was made with after tax monies. I am hoping it is just a typo, because if you have been taking a deduction on the $6K contribution and then immediately converting that to a Roth, without reporting that conversion on form 8606 when you filed your taxes, and then paying taxes on the conversion, you have a b
      ig tax problem awaiting you.

  38. I agree the that returns on a Roth will more or less be the same as a Traditional IRA. My reason for trying to convert as much as possible to a Roth without paying excessive taxes is the Minimum Required Distribution which kicks in for Traditional IRAs. That could bump my income up into the higher tax brackets. For people who do successfully plan for retirement, I think there’s a good chance your income will be higher after you retire. Your investments will be growing exponentially and it doesn’t take long for your passive income to exceed your former salary. Of course, you can try to get as much tax free income as possible, but some taxable investments have higher returns even after taxes.

  39. Sam,

    For those who have maxed out all pre-tax opportunities, doesn’t it make sense for high income earners to do a back door Roth contribution for the first $6k ($12k for couples) thereafter before putting those funds in a brokerage account? Why not take the Tax free savings on earnings and ability to access without penalty after five years if absolutely needed? I’ve always thought this is a no brainer but maybe I’m missing something so figured I’d ask.

    Thanks for another amazing post and your hard work for all of us out here reading it!!


    1. I keep coming back to this too. After law school, my salary was already above the deductible limit for traditional IRAs, and I couldn’t contribute pre-tax to an IRA and I was also over the limit to contribute to Roth. So once I max out my 401k, isn’t it logical to backdoor into Roth before putting into a brokerage? As Ryan points out, either way I’m investing post-tax money and this way my gains are tax free.

    2. Ruthless Economist

      I also second this! The math for Y = A * B; A = Y / B; Y = B * A doesn’t quite apply here, because the $6,000 ($12,000) is just income on which we have already paid our taxes. To the extent that you’re going to save that either way, it doesn’t matter what future tax rates are, right? So it’s either save the $6,000 in a traditional IRA and just convert it to Roth immediately (the standard backdoor IRA contribution), shielding those gains from future taxes, or save it in a fully taxable account, and pay taxes on all your gains at whatever rate they’re realized.

      For those high-earners, the elimination of the Roth conversion would block the backdoor Roth strategy to contribute, and be a pretty significant negative, no?

  40. Thanks for the great post. This has been on my mind with the potential changes to Roth conversions.

    I’m new to your site, so haven’t researched past posts. I currently max out a Roth 401K while being in a high tax bracket. Is that completely stupid of me to do so? I like a set it and forget it mode, so I know later on in life I’ll be grateful for the Roth portion. I’m 38 by the way. Thanks!

  41. Good post. What types of income do you have your kids take? Maybe a post on this. Beyond kid modeling or lawn care and lemonade stands, I’d love to know how to help the kids earn income.

  42. WOW super thorough post! Thanks for putting together so many examples and details. I had a chuckle with the Y = A * B; A = Y / B; Y = B * A line. Very true! I opened a ROTH IRA during my first job that didn’t have any 401k benefits. I still have the account, but it’s super small. I focused on my 401k as soon as I got access to it at my subsequent jobs.

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