Should I Convert Some of My IRA to a Roth?

Meet James and Linda

James is 65 and Linda is 63. They are approaching retirement with $1 million saved across traditional, taxable, and Roth accounts. James plans to retire at 67. Their combined Social Security benefits are expected to reach $48,000 a year once both are collecting, and they plan for $65,000 in annual after-tax living expenses.

They want to know whether moving some of their traditional retirement savings into Roth accounts could reduce future taxes without putting their retirement at risk.

What SageonRQ found

SageonRQ compared their Current Plan with a Modeled Plan that included $617,300 in total projected Roth conversions. The results below come from the year-by-year ledger through age 90. After-tax ending value is the projected amount left after accounting for taxes embedded in ending savings.

Compared with Current, the Modeled Plan projects $290,316 more after-tax retirement value, $27,806 less in lifetime taxes, $962,598 fewer lifetime RMDs, and $3,106,085 more in ending Roth savings.

Why do these differences matter?

1. More money after taxes

The Modeled Plan ends with about $290,000 more after-tax savings at age 90. This is a projection, not a promise. It reflects the combined effect of the selected investment mix, Roth conversions, withdrawals, and taxes.

2. Less tax over retirement

James and Linda are projected to pay $27,806 less in lifetime taxes. A Roth conversion can create taxes in the year it is made, but may reduce taxes later. The timing and amount matter.

3. Fewer required withdrawals

The Modeled Plan reduces projected lifetime required minimum distributions (RMDs) by $962,598. RMDs can create taxable income even when you do not need the money for spending. This reduction is not $962,598 in tax savings. It means less money must be withdrawn under the RMD rules. See Betty Jones’s RMD case study.

4. More Roth savings

Their projected ending Roth savings rise from about $672,000 to $3.78 million. Qualified Roth withdrawals generally do not add to federal taxable income. That can offer more choice when paying for a large expense or planning for a surviving spouse or heirs, subject to account and beneficiary rules. Read the surviving-spouse case study.

What about investment growth?

SageonRQ starts with the same set of investment return assumptions for both plans. As it tests strategies, the investment mix can change based on each household’s facts. A more conservative or more aggressive mix may produce a different projected return.

In this case, the overall annual return assumptions shown in later ledger years are 7.4% for Current and 7.6% for Modeled, a difference of 0.2 percentage points. Neither return is guaranteed. The modeled investment mix, Roth conversions, withdrawals, and tax effects all contribute to the projected result. The $290,316 gain should not be credited to Roth conversions alone.

Should you convert your IRA?

Maybe. Your answer depends on your income, tax rates, savings, spending needs, retirement date, Medicare costs, and how you expect to use your money. A conversion can help one household and hurt another. See Michael Thompson’s retirement-tax tradeoff.

SageonRQ’s Retirement Opportunity Audit compares your current approach with a modeled strategy. Retirement Strategy Navigator is planned to show the detailed year-by-year plan behind the results so you can review the choices before acting.

Common questions

Do I have to convert my entire IRA?

No. You can convert part of an eligible traditional IRA. The amount and timing should fit your tax situation and retirement goals.

Will I owe taxes on a Roth conversion?

Generally, yes, on the taxable portion converted. The amount may also affect Medicare premiums and other income-based costs.

Can a Roth conversion reduce my future RMDs?

Yes. Roth IRA owners are not required to take lifetime RMDs from their Roth IRAs under current rules. Converting eligible traditional retirement funds can reduce future RMDs from those traditional accounts.

Is a Roth conversion always the best choice?

No. A conversion may raise lifetime taxes or reduce ending savings. Your specific circumstances need to be tested.

What should I do next?

Start with your own SageonRQ Retirement Opportunity Audit. Compare the results, then review the detailed choices before making a conversion.