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 and offers special tax treatment when money is withdrawn.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 a portion of your earned income to a future tax year (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long as you are below certain income limitations) and pay income taxes as ordinary income in a future tax year it is withdrawn.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pay income taxes on your earned income and invest a portion of it tax free, and pay no income tax in the tax year it is withdrawn (as long as it is held for five years and your current income is below certain income limitations).

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 age 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 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 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 the breakdown of income into marginal tax brackets:

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%, when we plot the effective tax rate for all filing statuses, including 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. Note that effective tax rates map to fixed dollar amounts for your filing status and your personal effective tax rate falls on one of the lines below.

A common recommendation for Roth IRA conversions is to convert IRA money until you reach the next higher tax bracket (or inflection point). This seems like 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 minimize your income tax over a lifetime you need to take a longer term approach.

Roth Conversion Projection

February 20, 2025 - The calculator below is currently under development / testing. Please exercise caution before taking any action based on these calculations.

This Roth conversion tool projects the value of your IRA, Roth IRA and taxable accounts into the future based on rates of return you specify, and models the impact of a minimum effective tax rate (fixed dollar amount) on your projected Roth conversions and RMD distributions. Roth conversions are performed to increase your income to meet your minimum tax threshold. If your minimum effective tax rate is zero, then this tool only performs Roth IRA conversions to take advantage of your standard deduction. Income taxes are paid from your available taxable account balance using the tax rates above. You can change your minimum effective tax rate to your desired value to see how your projected after-tax portfolio is impacted.

Life Expectancy
Name
Birthday
Social Security start age
Monthly Social Security benefit
Start RMD age
Filing Status
Minimum effective tax rate Target income

Required Minimum Distributions

In 2025, the IRS requires minimum distributions from your IRA in the year you turn 73. For this Roth conversion tool Start RMD age above is the age at which the required minimum distribution algorithm is applied to the analysis. The RMD algorithm performs an IRA distribution of your projected IRA account balance divided by your projected life expectancy in years (as listed in the IRS life expectancy tables) into your taxable account. 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 (fixed dollar amount), then the RMD supercedes your minimum effective tax rate. Click on the summary button at the bottom of the page to see the annual numbers behind this analysis.

Note that Roth conversions cannot be used to satisfy your required minimum distribution and Roth IRAs do not have RMDs.

IRMAA

The Social Security Administration adjusts your Medicare Parts B & D premiums if your MAGI is above certain levels. 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. If you distribute your tax liability over your lifetime you can minimize the impact of IRMAA. This tool pays IRMAA premiums from your taxable account.

NIIT

A 3.8% net investment income tax (NIIT) is levied on individuals whose MAGI exceeds the following limits:

This tool pays NIIT taxes from your taxable account.

Analyzing Tax Rate Projections

Future tax rates are unknown, they can 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 percentage each year regardless of tax law changes. The question then becomes:

Is there an optimal minimum effective tax rate to maximize your retirement portfolio?

The chart below displays the various outcomes of this Roth conversion strategy over a range of minimum effective tax rates using the data you provided. The projected after-tax portfolio and total tax values are based on your life expectancy.

You can view the summary of this Roth conversion strategy by clicking on the buttons below. The Roth Conversion column displays the dollar amount of Roth conversion needed at each age to either maximize your projected after-tax portfolio or minimize your total tax paid.

Roth Conversion Analysis

The following factors impact the results of this Roth conversion strategy:

Longevity
Traditional IRA & Taxable balances
Market return
All future taxable income (job, Social Security, dividends & capital gains, lottery)
Future tax rates and filing status

In order to satisfy a minimum tax rate, this strategy performs taxable Roth IRA conversions as necessary. While your optimal minimum effective tax rate will change based on the factors above, your recommended minimum effective tax rate seeks to put you on a course to maximize your retirement portfolio by distributing your income tax burden across your remaining lifetime. Unfortunately, no one can 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