February 13, 2026, 5:07 a.m. ET
A Look at Roth Conversions and Retirement Savings
A Roth conversion is essentially moving assets from a traditional retirement account, like an IRA or 401(k), into a Roth IRA. The catch? You pay income tax on the amount you convert in that tax year. However, the upside is that once it’s in the Roth account, it grows tax-free, and withdrawals during retirement won’t be taxed either. Also, unlike traditional IRAs, Roth accounts don’t require minimum distributions, and they’re not taxed for heirs.
According to the Financial Industry Regulatory Authority (FINRA), taxes can be a major expense for retirees. Hence, those with most savings in traditional accounts might find themselves pondering the benefits of a Roth account. Interestingly, more individuals have been making this shift; there was a 46% increase in conversions during the second quarter of 2024 compared to the previous year across various age groups, based on Fidelity’s data.
However, not every situation is the same. “A detailed analysis is crucial to understand if converting to a Roth makes sense for you,” says Chris Barkel, who heads AXIS Financial. “Two people might have almost identical circumstances but still face different outcomes based on one differing factor.”
Mathematical Considerations for Roth Conversions
Often, individuals compare their current tax rate to what they expect it to be in the future. As a general guideline, if future tax rates seem higher, it usually makes conversion more appealing. Conversely, if they expect tax rates to fall, it might not be as advantageous, according to investment firm Vanguard.
Financial advisors suggest this approach is a good starting point, yet Vanguard emphasizes that it simplifies the complexities involved. They advocate for a “break-even tax rate” or BETR, which helps determine if a conversion balances out over time.
Basically, BETR is what your future tax rate will be regardless of whether you choose to convert or not. You can actually calculate this using Vanguard’s Roth BETR Calculator.
Understanding BETR
To assess whether a Roth conversion is beneficial, compare your projected future tax rate against the BETR. Vanguard mentions that sometimes, the choice hinges on a single number.
- If your future tax rate is equal to BETR, a conversion won’t change your situation.
- If it’s below BETR, converting could reduce returns.
- If your rate is above BETR, the conversion is likely a better choice.
For instance, suppose someone has $100,000 in a traditional IRA and is in the 35% tax bracket. They might predict a 24% rate when they retire. If that account grows to $300,000 over 20 years and they skip a Roth conversion, taking out funds then would yield about $228,000 after taxes.
Now, if they go for a Roth conversion, they’d pay $35,000 upfront in taxes. Even assuming that amount could’ve grown to $70,000 if invested, the final amount after two decades would only be $230,000. Yet that’s still a $2,000 advantage, despite the lower anticipated tax rate.
Factors to Weigh for a Roth Conversion
While BETR offers a solid framework, it doesn’t account for every nuance in individual scenarios. Berkel points out that softer elements also matter—things like existing savings in taxable, pre-tax, or tax-free accounts, alongside other future income sources like pensions and Social Security.
Moreover, don’t overlook personal expenditures, including how much you aim to spend during retirement. Many people aren’t fully aware that leaving behind a significant pre-tax IRA for heirs could result in higher tax burdens for them. Some may not mind, but others might want to be more considerate of future tax implications for their children.
Legally, most non-spouse IRA beneficiaries are required to withdraw the entire account by December 31 of the 10th year after the original owner’s death. If the deceased was already taking required minimum distributions, the heirs must continue those annually until the account is drained by the tenth year. It’s important to note that distributions from inherited Roth accounts, if they’ve been established for over five years, aren’t taxed.
