Roth IRAs and Roth Conversions: It Depends

Every few years, something happens in Washington that sends financial commentators scrambling to tell you to convert your Traditional IRA to a Roth. The passage of the One Big Beautiful Act (OBBA) in July 2025 is the latest trigger. Before you act on that advice, it’s worth understanding what a Roth IRA actually is and what assumptions you’d be making if you converted.

What a Roth IRA Is

A Roth IRA is funded with after-tax dollars — contributions are not tax-deductible. In exchange, investment gains and income grow tax-free, and qualified withdrawals after age 59½ (once a five-year holding requirement is met) are also tax-free. Roth IRAs have no required minimum distributions (RMDs) for the owner or a surviving spouse. Non-spousal beneficiaries receive tax-free distributions but are subject to RMD rules and the 10-year distribution rule.

That flexibility — the ability to generate tax-free cash flow in retirement and pass assets to heirs without a tax bill — is genuinely valuable. I am an enthusiastic proponent of funding your Roth IRA every year you are eligible, for as long as you are eligible.

What a Roth Conversion Is

Converting a Traditional IRA to a Roth is a different decision entirely. You pay taxes today on the converted amount, betting that you’ll end up with more after-tax wealth in retirement — and that your heirs will too — than if you had left the money in the Traditional IRA. That bet may or may not pay off. It depends on variables that are specific to your situation.

One of my favorite maxims applies here: The assumptions you don’t know you’re making will kill you.

Here are the three questions worth asking before you convert.

Question 1: How much tax will you owe?

The tax on a conversion is calculated on the taxable portion of the IRA you’re converting. If you made non-deductible contributions to your Traditional IRA over the years, you have a cost basis — and that portion isn’t taxable. But you must have tracked and reported that cost basis to the IRS each year using Form 8606 attached to your tax return. If you haven’t, demonstrating to the IRS that 100% of your IRA isn’t taxable becomes very difficult.

Beyond the basic tax calculation, here are additional questions related to taxes owed:

1. Will the conversion push you into a higher bracket?
2. Will it affect your eligibility for tax credits — the dependent child credit, college tuition credits?
3. Will the additional income affect how your Social Security benefits are taxed, or trigger higher Medicare premiums?

If you have a high, well-documented cost basis in your IRA, the conversion tax may be small — and that argues for converting. If the tax hit is large and complicated, that argues for caution.

The conversion tax is the price of admission. Know what you’re paying before you buy the ticket.

Question 2: Where will you get the money to pay the tax?

This question doesn’t get enough attention.

Using money from the IRA itself is generally a bad idea — you lose the tax-deferred growth on whatever you distribute. If you’re under 59½, it’s a worse idea: you’ll owe a 10% penalty on any amount you take from the Traditional IRA that isn’t rolled into the Roth.

Some advisors suggest borrowing against your home equity to cover the conversion tax. It’s worth considering, but ask yourself this: would you normally borrow against your house to invest in stocks and bonds? If not, don’t do it here just because the investment bucket is different.

Using money from taxable savings or investment accounts to pay the tax carries its own cost. Whatever you spend on conversion taxes isn’t working for you anymore. I’ve seen conversion analyses that assume 8% returns inside the Roth but only 5% on the money used to pay the tax — without explaining why. If you know where to get 8% in a Roth, you should be able to get it outside one, too. I’ve also seen analyses that assume all returns on non-Roth accounts are distributed and taxed each year. That may be reasonable for a bond fund; it is not a reasonable assumption for a well-managed stock portfolio.

The math on opportunity costs and breakeven points gets complicated quickly. We’ve built a spreadsheet to help you think through your specific situation — contact us, and we’ll send you a copy.

Where the tax money comes from matters as much as how much tax you owe.

Question 3: Will your tax bracket be higher or lower in retirement?

If you expect to be in a higher bracket when you take distributions than you are today, conversion makes sense — you’re paying a lower rate now to avoid a higher rate later. If you expect to be in a lower bracket in retirement, conversion likely doesn’t make sense — you’d be prepaying tax at a higher rate than necessary.

The same logic applies to your beneficiaries. If your heirs are likely to be in higher brackets than you are today, that’s an argument for converting. If they’re likely to be in lower brackets — or if you’re planning to leave assets to charity, which pays no income tax — that argues against it.

Your future tax bracket, and your beneficiaries’ tax brackets, may be the most important variable in this decision.

The Bottom Line

I am enthusiastic about funding your Roth IRA every year you’re eligible. That’s a straightforward yes.

Roth conversions are a different matter. The case for converting depends on your specific tax situation, where you’ll find the money to pay the tax, and reasonable assumptions about tax rates years or decades from now. Get those assumptions wrong — or not examine them at all — and the conversion that was supposed to make you wealthier after tax does the opposite.

There’s no reliable rule of thumb here other than: it depends. If you’d like to work through whether a conversion makes sense for your situation, give us a call.

The opinions expressed are those of Anthony Muhlenkamp and are not intended to forecast future events, guarantee future results, or offer investment advice.