Overview of Are Roth Conversions Necessary? | ChooseFI (Ep. 581)
This episode features Sean Mullaney and Cody Garrett (authors of Tax Planning to and through Early Retirement) discussing whether taxable Roth conversions are necessary, when they make sense, and common misconceptions. The hosts distinguish taxable Roth conversions from backdoor and mega backdoor Roth tactics, examine timing (working years vs. retirement), show real examples, highlight behavioral drivers behind the “do-it-now” drumbeat, and offer practical heuristics for deciding if — and how much — to convert.
Key takeaways
- There are different Roth-related moves with different implications:
- Backdoor Roth (contribution workaround) and mega backdoor Roth (workplace plan option) typically are non‑taxable ways to get money into Roth accounts.
- Taxable Roth conversions move pre-tax retirement assets (traditional IRA/401(k)) into a Roth and create taxable income in the conversion year.
- Taxable Roth conversions are elective and unlimited in amount (you only need a pre-tax retirement account). They are taxable in the year of conversion.
- For most people, taxable Roth conversions are useful but not necessary. They’re powerful tactical tools in specific situations, not a universal requirement.
- Timing matters:
- Generally avoid large taxable Roth conversions during high-W‑2 (working) years because they stack on top of existing income.
- Favor conversions in low-income or “income disruption” years (e.g., career change, temporary unemployment, graduate school).
- In retirement, many people are lightly taxed due to:
- High standard deduction and low yields/dividend rates on taxable accounts.
- Favorable long-term capital gains treatment.
- Married filing joint brackets that allow substantial income at low effective tax rates.
- Roth conversions reduce future RMDs (no RMDs from Roth IRAs), which mainly benefits: (a) your older self in later decades and (b) heirs who inherit Roth assets tax-free. Both are valid goals but may be lower priorities than funding your own retirement spending and experiences.
- Hype and urgency often come from incentives (advisors seeking engagement, creators seeking clicks) and outdated assumptions. Ask: who benefits from the “you must convert” message?
Roth conversion types (brief)
- Backdoor Roth: Non-taxable maneuver to contribute to a Roth IRA when direct Roth contributions are restricted by income. Good during working years if you want Roth money and can’t make direct Roth contributions.
- Mega backdoor Roth: Allows large Roth contributions through employer plan after-tax contributions + in-plan conversion or distribution; relies on plan features and IRS guidance.
- Taxable Roth conversion: Converting pre-tax retirement balances to Roth; creates ordinary taxable income in the year of conversion.
When Roth conversions are most and least appropriate
- Least appropriate:
- Years with significant W‑2 income (you’ll likely be in higher marginal brackets).
- When conversions concentrate income into a single year and push you into higher brackets rather than spreading income.
- Most appropriate:
- Low-income years (income disruption, early-retirement transition years).
- When you can convert within low brackets (0%, 10%, 12% or up through the 22–24% range depending on your goals).
- When your goal is estate-tax or heir-tax planning and you value leaving tax-free Roth assets.
- When you desire to prepay taxes for predictable tax control (a non-quantitative reason many cite).
Behavioral and policy context
- Many commentators push conversions due to incentives (relevance, clicks, advisor activity) or outdated models. Demand critical thinking.
- Legislative risk: converting to Roth (taxable conversions) has been available for everyone since 2010; while proposals to limit conversions have surfaced, large structural bans are unlikely because the government collects tax revenue on conversions.
- “Return on hassle”: measure the time, complexity, and stress of planning vs. likely dollar benefits. Avoid optimization as procrastination.
Practical heuristics and rules of thumb
- Simple starting question: Do you have a W‑2 and materially high current income? If yes → generally avoid taxable Roth conversions now.
- Spread income across years. If tax system favors spreading income (large standard deduction, low lower brackets), don’t concentrate income in one year via a large conversion.
- Consider modest, targeted conversions (a “tailored taxable Roth conversion”) rather than all-or-nothing. These can sometimes be done with little or no federal tax liability.
- Model scenarios: project taxable income sources in retirement (taxable brokerage dividends/interest, long-term capital gains, Social Security, RMDs) before converting.
- Prioritize living and experiences: weigh paying some tax now for future tax savings vs. spending on life/charity now — especially if conversions mainly benefit heirs or your distant elder self.
- If estate/heir concerns dominate: consider charitable bequests, splitting benefits among multiple heirs, or leaving a portion to charity to reduce taxable inheritance slices.
Illustrative examples from the episode
- Cody’s career transition: Became a W‑2 worker at lower pay; used that low-income year to convert 403(b) funds into Roth while taxed in low brackets (10–12%).
- 60-year-old single with $5M traditional IRA: Converting through the 24% bracket could reduce future RMDs taxed at 32% — but this is an uncommon, high‑net‑worth case, and even here the person will be fine without converting; tax savings exist but are often modest relative to overall wealth.
- Worst‑case “widow’s tax trap” example (81-year-old widow with $3.68M traditional IRA): Even with large RMDs and some portions taxed up to 32%, the retiree still has substantial after-tax cash flow. The episode calls such later-life higher taxes “garbage-time touchdowns” for the IRS — not necessarily a catastrophe for the retiree.
Benefits vs. drawbacks (summary)
- Benefits:
- Tax-free compounding and tax-free qualified distributions in Roth accounts.
- Reduce future RMDs and potential brackets for future retirees.
- Can simplify future tax planning for heirs (Roth inherited assets are tax-free distributions).
- Ability to control when you pay taxes (psychological benefit).
- Drawbacks:
- Creates taxable income in the year of conversion; can push you into higher brackets and phaseouts (credits, Medicare IRMAA).
- Uses cash (or liquidates assets) to pay tax now.
- May primarily benefit heirs or distant future self rather than current spending needs.
- Administrative hassle and planning time.
Action checklist (what to do next)
- Do a quick screening:
- Are you in a high W‑2 income year? If yes, hold off on taxable Roth conversions.
- Do you have a low-income year coming? Plan partial conversions that use bracket space.
- Project retirement taxable income sources: taxable brokerage income (dividends, LT capital gains), Social Security timing, pension/RMD timing.
- Calculate bracket headroom with standard deduction and expected taxable income per year (married filing jointly vs single).
- Consider modest, spread-out conversions (vs. one large conversion).
- Weigh Roth conversion tax cost vs. spending/giving today (“return on hassle”).
- If worried about heirs, evaluate alternatives: charitable bequests, split beneficiaries, partial Rothing, or taxable gifting.
- If unsure, model scenarios with an advisor or use spreadsheets (authors offer spreadsheets and case studies).
Notable quotes / insights
- “Roth conversions are a benefit, not a necessity.”
- “Spread out income, spread out income, spread out income.”
- “The primary beneficiaries of many Roth conversions are your 75+ self and your heirs.”
- “Large tax hits late in life are often ‘garbage time touchdowns’ for the IRS — painful to watch but not game‑deciding for your retirement.”
Resources mentioned
- Book: Tax Planning to and through Early Retirement — Cody Garrett & Sean Mullaney.
- Sean Mullaney: milaneyfinancial.com; fitaxguy.com (blog).
- Cody Garrett: measuretwicemoney.com (YouTube content and calculators).
- ChooseFI episode: Ep. 581 (this summary).
Final thought: Roth conversions are a flexible tool. Use them deliberately: model your situation, focus on years with low taxable income, prefer modest/layered conversions, and avoid the all-or-nothing FOMO narrative.