By Dr. Jim Dahle, WCI FounderRoth conversions and contributions may be the most challenging topic in personal finance and investing. Deciding whether, when, and how much to convert or contribute is difficult because it relies on so many factors, some of which are unknown (and unknowable) to those making the decisions. The frequency of how often this decision is faced doesn't help. I mean, you can make Roth contributions just about every month throughout your accumulation phase, and Roth conversions are an annual decision in both the accumulation and the decumulation phase. It's unlikely you're going to get it right every time, so give yourself some grace for past bad decisions. You're choosing between good and better most of the time anyway.
Even the best rule of thumb I can come up with (tax-deferred contributions and no conversions during peak earnings years) has so many exceptions that it is almost useless. In today's post, we're going to discuss a dozen factors you may not have considered, all of which would cause you to lean more toward making Roth IRA contributions or doing a Roth conversion. The two decisions are surprisingly similar and, in practice, they can be effectively lumped together. If making a Roth contribution is correct, you probably ought to be considering Roth conversions, too. None of these factors changes the primary factor, which is a comparison of your tax bracket at the time of contribution (or conversion) and the future tax bracket of the person or entity withdrawing it from the account later.
But they do add complexity and nuance to the decision.
#1 Higher Widow/Widower Tax Brackets
While a generalization, women tend to marry older men, and men tend to die younger than women. That often results in a lengthy period of life as a widow that could easily be a decade or longer. Widowers, while more rare, have the same issue, of course. When one spouse dies, income and expenses decrease, but they usually aren't halved. Your tax bracket, however, likely will be. Thus, you not only lose the companionship of your spouse, but your tax bill goes up, too. The more likely a lengthy widow/widower period is in your relationship, the more you should lean toward doing Roth contributions and conversions.
More information here:
Should You Make Roth or Traditional 401(k) Contributions?
#2 No Need or Desire to Spend RMDs
People complain about Required Minimum Distributions (RMDs) all the time. They probably shouldn't. All an RMD says is that you've maximized the benefit of this tax-protected account and that it's time to reinvest the dollars in a taxable account, assuming you don't want to spend it (which you probably should if you can find something to spend it on that will make someone's life happier). But if you just plan to reinvest RMDs in taxable, you probably should have done more Roth conversions/contributions earlier in life. Roth accounts don't have RMDs, so that money can grow for a few more years or even decades in a tax- and asset-protected way.
#3 Falling Basis Percentage
While taxable accounts are sometimes drained completely before much is taken out of tax-deferred and Roth retirement accounts, plenty of people opt to keep all three types of accounts well into retirement. The larger your taxable account, the more you should lean toward Roth contributions and conversions, all else being equal. Not only does the taxable account provide a source of funds to pay for the conversion, but it also means you are less likely to actually want to spend your RMDs (see #2).
However, there is another issue here. That issue is that, when selling shares in a taxable account, you generally want to sell the ones with the highest basis (what you paid for the shares). The higher the basis, the more spendable money you have after paying the tax on the sale. For example, if you have $100,000 in shares that you paid $90,000 for and you are in the 15% Long Term Capital Gains (LTCG) bracket, your tax bill on that $100,000 in spending is only $1,500. The longer your retirement goes, the lower your basis is going to be on the shares you need to sell. Eventually, you might be selling $100,000 in shares that you only paid $10,000 for. Now you're going to owe $13,500 in taxes on that $100,000 in spendable money. This favors using that money earlier to do Roth conversions.
#4 Falling Depreciation Sheltered Income
Taxable equity real estate investors often benefit from depreciation sheltering their income from the investment from taxation. However, the longer you own the property, the less sheltered that income becomes. Eventually, it may all be fully taxable at ordinary income tax rates, and you may wish you had more in Roth accounts and less in tax-deferred accounts.
#5 Social Security Taxation
Hopefully, this example won't apply to too many WCIers, but if you have very low taxable income in retirement, you may find that a substantial portion of your Social Security income is not taxable at all. Under current law, 15% of that income is always tax-free, but below an income (AGI plus non-taxable interest plus half of Social Security) of $34,000 ($44,000 MFJ), even more may be tax-free.
More information here:
Roth vs. Tax-Deferred: The Critical Concept of Filling the Tax Brackets
#6 Higher ACA Premium Tax Credit
Early retirees often purchase health insurance from the Affordable Care Act marketplace in their state. The lower your income, the higher the credit to help you pay for that policy. The rules on this seem to be constantly changing, but in general, an income of between 100%-400% of the federal poverty guideline for your family size will qualify for a credit. For a family of two in my state in 2025, that guideline is $21,150, and 400% of that is $84,600. Spending Roth money instead of tax-deferred money might help someone qualify for more of that credit.
#7 Lower IRMAA Surcharge
At age 65, people stop playing the ACA game and start playing the IRMAA game. IRMAA stands for Income-Related Monthly Adjustment Amount, and it is a surcharge for Medicare for the well-to-do. The higher your Modified Adjusted Gross Income (MAGI), the higher your surcharge. Having more Roth and less tax-deferred money to spend lowers the surcharge for many retirees in any given year. It essentially functions as a stealth tax. While only 8% of Americans pay IRMAA, most WCIers will. Maximum IRMAA is over $500 a month. Each. So, it could total over $12,000 per year. More Roth and less tax-deferred helps reduce that surcharge.
#8 Fewer Dividends to Be Taxed
If you use your taxable account to pay for Roth conversions, you won't get nearly as much in taxable dividends in retirement. While those are often taxed at a lower qualified dividend rate, they are taxed. More Roth equals less tax.
#9 Kids Do Better Than Parents
While not always true, especially among the high-income folks who tend to read this site, the next generation historically does better economically than the prior one. So, when they receive a little tax-deferred inheritance from their parents, it is often heavily taxed. Having managed my parents' portfolio and having helped them with their estate planning, I know that most of my inheritance will be tax-deferred. And it's all going to be taxed at 37%, a tax rate they never paid in their life. More Roth conversions and contributions sure would have helped me out. Maybe do your kids a favor and pay the tax at your lower rate.
More information here:
Why Wealthy Charitable People Should Not Do Roth Conversions
Supersavers and the Roth vs. Traditional 401(k) Dilemma
#10 Kids Inherit Money at Peak Earnings Years
In general, your peak earnings years tend to be in your 50s. That also happens to be when parents are most likely to die. If your parent is 30 years older than you and dies as expected in their mid-80s, you'll be in your mid-50s, smack dab in the middle of peak income. And that tax-deferred inheritance is going to be taxed as high or higher than anything else you ever earn. That argues for more Roth.
#11 Your Kids (and Their Tax Preparer) May Not Know About Income in Respect to Decedent
Doing Roth conversions lowers the amount of estate tax paid because it shrinks the estate. However, there is a tax deduction that makes up for that extra estate tax referred to as Income in Respect of a Decedent (IRD). It's basically a tax deduction your heirs can claim for the extra estate tax paid due to failure to do a Roth conversion. However, they have to know about it. And since you just learned about it in this paragraph, what are the odds that they're going to know about it? Maybe not so good. It's a good reason to do more Roth.
#12 Behavioral Push to Save More
We often make these decisions and calculations as though we are the mythical homo economicus—that perfectly unemotional, logical, and theoretical person that does not exist. In reality, investment behavior matters more than investment logic. People tend to put the same amount of money into their retirement accounts, whether it is Roth or tax-deferred. Thus, if they save in Roth, they save more, at least in after-tax terms.
Even our retirement accounts are set up this way. Someone under 50 can put $23,500 as an employee contribution into a tax-deferred 401(k) [2025 — visit our annual numbers page to get the most up-to-date figures]. Or $23,500 into a Roth 401(k). Those numbers might look the same, but they aren't on an after-tax basis. For someone with a 45% marginal tax rate (federal plus state), $23,500 into a Roth 401(k) is the equivalent of $42,727 into a tax-deferred 401(k). Not the same thing. If you, like most of us, are not homo economicus, you might lean a little more toward Roth. Even if you don't, be sure to put additional money into a taxable account to make up for that lower contribution.
The Story of The Heckler
I was speaking at a meeting for the Society of Thoracic Surgeons and actually had a heckler for the first time I can remember at a talk like that. It was a financial advisor who had sat through my talk for some bizarre reason. She felt I was giving bad advice because I shared the general rule of thumb to use tax-deferred accounts during peak earnings years. Her argument was essentially that everyone should do Roth all the time. Well, “always” and “never” are dangerous words, and her argument was obviously ridiculous.
As Einstein said, “Everything should be made as simple as possible, but not simpler.” The Roth vs. tax-deferred (or the Roth conversion) decision is going to remain pretty darn complicated. Do the best you can and don't beat yourself up if you don't get it right every time. But do take these 12 factors into consideration.
What do you think? What are the most important factors to you when it comes to Roth contributions and conversions? Are you doing either this year? Why or why not?
Only in the past few years (thanks to WCI for alerting me to these factors) have I been aware of IRMAA and the widow’s jump in tax bracket. Even today the note of 50% the standard deduction and that extra $3K or so in taxes is an epiphany.
I had originally planned to hedge our bets with 50% Roth. Now I plan all Roth, converting up to the top of the 24% bracket we’re in, bar amounts I (but not spouse) will use as charitable contributions later in life. The amount left in my TSP covers that and having to exit the TSP to Roth convert is the other reason. However note this well:
Apparently in 2026 we’ll be able to do Roth conversions inside our TSP even retired as we are. Awaiting further news.
Also note IRMAA is based on MAGI 2 years earlier, so in my 63rd year I am already affecting my first IRMAA rate.
Part of our plan if widowed is to max out Roth converting to top of that last marital tax bracket the year we are widowed. Especially for my spouse who won’t be doing QCDs.
Good point about IRMAA really starting at 63.
Jenn, just related to the 2 year look back for Medicare IRMAA considerations, you can file an SSA-44 based on certain life events in order to get Medicare to look at your income in the current year rather than 2 years earlier. One such event is a change in employment, including retirement.
Thanks Larry I might try it on- temporarily much higher MAGI due to Roth conversions and selling a farm soon. I’ll report back if that might work.
@WCI,
“But do take these 12 factors into consideration.”
Please run the new article, “12 Reasons to Consider More Pre-tax” as I am pretty sure you realize each one of the 12 above has a “twin” who is going to be better off by not wasting money on taxes that they don’t need to waste.
Please write and submit it yourself Dave, or put it as a comment here. I don’t think all have a clear rebuttal- got to #2 and felt the opposite of ‘Roth is good if no need to spend RMDs’ would partly be ‘don’t mind possibly high tax brackets once RMDs begin’.
Jenn,
I would be happy to write an article and submit it if Jim wants. After all I did help him review his first book before it was published in 2014. I have been on the “Roth myths” crusade for many years. Many people get it more now than 10 years ago. My first “major” article on the subject was written in 2016 and has 319 comments, so the chore would not be too hard. Maybe WCI could reciprocate and check my grammar. At 73 my fingers and brain don’t always connect the first time!
https://www.whitecoatinvestor.com/contact/guest-post-policy/
We had another reader write in to me unsolicited to offer his guest post to rebut Jim’s post from a couple of days ago on Why Going 1099 Won’t Solve All Your Financial Problems. (https://www.whitecoatinvestor.com/why-going-1099-wont-solve-all-your-financial-problems/)
It was good, and I accepted it to run in the next few months. That could be you, Financial Dave!
Good idea. You’re right of course. It’s a very complicated topic and anyone who thinks it’s simple just doesn’t understand it.
Yes, 10 years ago I thought it was pretty simple too, and the basics are, but there is so much more. I think using the word “Roth” in the title gets more readers, so maybe I’ll work on “13 ways in which Less Roth can be More.” Give me a few days to work it out. I know it’s no guarantee, but I have learned over the years, the teacher learns along with the students, so writing it is half the fun.
Looking forward to it, and will try to hold off any more conversions until I’ve read it LOL
Jenn,
Here is a teaser to my “13 Reasons Why Less Roth Can Be More”
#13 TAX-DEFERRED IS THE ONLY CHANCE OF TAX-FREE INCOME.
Hint this is only about Roth vs TIRA and you did mention it in your comment above.
So much to think about. I agree it’s a very complicated topic.
One question that’s come up recently in my conversations:
In a household with one working spouse and the other not currently working, can the spouse who is not currently working do a Roth conversion and benefit from having no income? Does it depend on whether the couple files separate or joint tax returns?
Thanks!
Matt
If they file separately, yes, but filing separately usually increases the overall tax bill. It’s easy to run the numbers both ways with tax software.
I think it’s pretty safe to say that the big majority of people that even contemplate this issue that it won’t even matter which Roth or pre-tax we pick. We are are the ones that are going to have enough saved that with either method we will be just fine in retirement.
That’s the reassuring thing about this challenging decision. Both are great options.
I am 68 years old, still working part time running the medical business I founded. I was a professor of medicine at the university medical center for much of my career, but my side business venture grew exponentially over the last decade.
Current marginal tax rate for Roth conversions would be 47.3%. Our income is around $5M per year. Tax deferred, taxable, and real estate investment net wealth is around 34.8M and the business estimated value is around 35M, making us wealthy beyond imagination. Our current annual federal and state tax bill is already a couple million.
Roth conversions would significantly increase annual taxes. We may move to a lower tax or no tax state in 5 to 10 years, but for now we are staying put for proximity to the grandchildren and I continue to enjoy keeping my hand in the medical business I founded.
Perhaps, theoretically, large Roth conversions would be beneficial, but I cannot wrap my head around paying even more taxes at 47.3%. We have been making big contributions to charity through our DAF, and perhaps more of that is preferable to large Roth conversions.
How much do you even have in tax-deferred? I’m guessing not that much as percentage of your $70M. So it really doesn’t matter what you do with it.And who’s going to spend that money anyway? If it were me, it would all be going to charity, so a Roth conversion on it really doesn’t make sense.
We have about $10 million in tax deferred. I don’t know of any way to get that money directly into our donor advised fund, but I think there is a mechanism to transfer money directly from tax deferred to charities each year. If we were to take the RMD’s, we would end up with around 53% of the value after taxes, so donating tax deferred dollars to charity allows magnification of impact. But I believe the limit for direct charitable contributions from tax deferred is $100,000 per year, so the impact is still somewhat limited.
Yea, QCDs can’t go to a DAF, but they can (up to $108K this year) go directly to a charity. But an RMD on $10K at 75 is about $400K, so the QCD isn’t going to eliminate that completely.