Roth Conversion Strategy

The United States offers a tax shelter to its citizens called an Individual Retirement Account, or IRA. IRA's come in two flavors, a Traditional IRA and a Roth IRA. An IRA is not an investment security, an IRA is simply an investment vehicle that holds investment securities (e.g. stocks, bonds, cash, real-estate, etc.) and offers special tax treatment when money is withdrawn.

U.S. income taxes are a pay me now (Roth IRA) or a pay me later (Traditional / Rollover IRA) situation. A Traditional IRA is a tax-deferred vehicle that allows you to defer income taxes to a future tax year by allowing you to deduct current year income from your taxable income, (as long as you are below certain income limitations) and pay income taxes as ordinary income in a future tax year it is withdrawn. A Roth IRA is a tax-exempt vehicle that allows you to pay taxes on money in the tax year it is earned and invest the remainder tax free, (as long as it is held for five years and your current income is below certain income limitations) and pay no income tax in the tax year it is withdrawn.

If your company has a 401k, 403b or 457b plan, these are preferable to a traditional IRA because they have higher contribution limits, and your tax deductible contributions to a traditional IRA will be limited. When you leave a job, you will be eligible to rollover your 401k, 403b or 457b plans to a rollover IRA in a tax-free transaction.

	Traditional IRA	Roth IRA
Defer income?	yes	no
Tax on withdraw?	yes, as ordinary income	no, if qualified withdraw
Contribution Limits 2025	$7,000 under 50, $8,000 50+ contributions must be earned income MAGI of less than $165,000 if single or head of household MAGI of less than $236,000 if married filing jointly

Tax Rates

The United States uses a progressive tax rate that increases as your taxable income increases. In other words, the more you make the higher percentage you pay. The following marginal tax brackets are in effect for tax year 2025 based on your filing status:

Each filing status has a standard deduction which can be used to exempt the first part of your income from taxes. You can think of this as a marginal tax rate of 0%. Taxpayers may itemize their tax return and exceed the standard deduction above if their situation warrants.

You can use the tool below to see how income tax is calculated using the tax brackets above. Selecting your filing status impacts the Roth conversion projection analysis below.

Total Income	Filing Status

Effective Tax Rate

Before analyzing this Roth conversion strategy, a discussion of effective tax rate is in order. You can calculate your effective tax rate by dividing your total tax by your total income:

effective tax rate =	total tax total income

While the difference between marginal tax brackets can be 2% to 10%, if we plot the effective tax rate for all filing statuses using the standard deduction over a wide range of incomes you will notice a smooth line of rates between 0% and 37% (the highest marginal rate) with inflections (change in slope) where marginal rates change.

A common recommendation for Roth IRA conversions is to convert until you reach the next higher tax bracket (or inflection point). This is a reasonable recommendation if you want to make progress on your Roth conversions while minimizing the impact to your income tax for this year, however if you want to optimize your income tax over a lifetime you need to take a longer term approach.

Roth Conversion Projections

This Roth conversion tool below allows you to set a minimum effective tax rate and project the value of your IRA and Roth IRA into the future based on a rate of return and projected Roth IRA conversions where taxes are paid from the proceeds of the conversions using the tax rates above. You can change your minimum effective tax rate to your desired value to see how your projected IRA balances and total taxes paid are impacted. If you set a minimum effective tax rate of zero, then this tool will only perform Roth IRA conversions to take advantage of your standard deduction and to satisfy RMDs. If an effective tax rate in this analysis is lower than your minimum it is because your traditional IRA conversions have been completed and your income is below your effective tax rate threshold.

The chart below displays your projected IRA / Roth IRA balances and total tax paid using this Roth conversion strategy.

IRA
Roth IRA
Annual market return on investment before expenses
Minimum effective tax rate
Birth year
Life expectancy
Earned Income
Retirement age
Social Security start age
Monthly Social Security Income
Start RMD age

Note Married couples filing jointly should combine the value of their IRAs and Roth IRAs in the tool above.

Start RMD age above is the age at which the required minimum distribution algorithm is applied to the analysis. The RMD algorithm performs a Roth IRA conversion of your projected IRA account balance divided by your projected life expectancy in years, as listed in the IRS life expectancy tables. Performing RMD distributions at an age earlier than 73 helps spread out your taxes over multiple years which can reduce your projected taxes paid over a lifetime. If your RMD calculation is higher than your minimum effective tax rate, then the RMD will supercede your minimum effective tax rate. Click on the details button below to see the numbers behind the analysis.

IRMAA

The Social Security Administration adjusts your Medicare Parts B & D premiums if your MAGI is above certain levels. While this is not a tax per se, it increases your Medicare premium expense in retirement. This Medicare Income-Related Monthly Adjustment Amount is commonly refered to as IRMAA. IRMAA looks at your MAGI from your previous tax return to determine your premium adjustment. To simplify calculations, this tool uses your projected income to determine your premium adjustment.

The chart below is an analysis of your projected annual IRMAA premiums across all minimum effective tax rates using the data you have entered:

Optimizing Effective Tax Rate

Future tax rates are unknown, they can either be higher or lower based on your individual situation. Since you can control the size of your Roth conversions, you can target your minimum effective tax rate to a certain value each year regardless of tax law changes. The question then becomes is there an optimal minimum effective tax rate to maximize your net worth in retirement?

The chart below is an analysis of your projected net worth and projected total taxes across all minimum effective tax rates using the data you have entered along with your highest projected net worth and your target tax rate:

You can view the details of the optimal Roth conversion strategy by clicking on the button below. The Conversion column displays the dollar amount of Roth conversion needed at each age to maximize your projected net worth using the data you provided to this tool.

Note This tool does not take into account all sources of taxable income reported to the IRS, so this tool should only be used to estimate the size of Roth IRA conversions. Income tax rates are subject to change and will also impact your minimum effective tax rate, therefore you should run a fresh analysis each year to see if your situation warrants adjusting your target effective tax rate.

Roth Conversion Analysis

The following factors impact maximizing your net worth using this strategy:

Longevity
Retirement age
Traditional IRA balance
Market return
All future taxable income (job, Social Security, dividends & capital gains, lottery)
Future tax rates and filing status
Minimum effective tax rate

If all of these estimates are correct, this Roth conversion strategy will calculate a minimum effective tax rate that distributes your income tax burden across your remaining lifetime resulting in maximizing your projected net worth by converting your traditional IRA assets to your Roth IRA. Unfortunately, we cannot predict future tax rates beyond a few years and the remaining items on the list above are unknowable with any certainty. The current value of your Roth IRA does not impact this analysis because that money already meets your end goal of tax-free income in retirement.

Rebalancing Financial Planning