To Roth or not to Roth? Part II

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I have advice for those of you who would dare to question the conventional wisdom about Roth conversions to your 401(k)s or IRAs:

Be prepared for significant pushback.

I should know, because I devoted last week’s column to questioning that conventional wisdom. I reported on extensive research that found that, though Roth conversions often work out in the end, it takes far longer than most realize for that benefit to be realized, and in any case the benefit is typically quite small.

The undefined was conducted by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University. Fully aware that his findings will engender this pushback, he makes public the undefined in which he incorporates the myriad factors that are relevant to determining if a conversion makes sense. In an interview, he said “you may indeed be among the lucky few who will receive a large and speedy payout from a Roth conversion, as opposed to the slow and small payout I found to be the norm. But you owe it to yourself to prove it with a spreadsheet.”

In this column I respond to a number of emails that I received after last week’s column. In each case I reached out to McQuarrie for his insights, which are included below.

“The study fails to mention a potential benefit of a Roth conversion: Reducing the Required Minimum Distribution (RMD) on the portion of retirement funds left in a traditional IRA. Some years ago (when income tax rates were actually higher), I gradually converted roughly half of my retirement portfolio to Roths. As a result, my RMD is quite low annually.”

McQuarrie’s response: Reducing one’s RMD is a common motivation for Roth conversions. But it’s not clear you will be better off for having done so. Though I can’t know your specific situation, there’s a good probability you paid a 28% tax rate on your conversions—in return for reducing RMDs that would otherwise have been taxed at 22%. If so, it will take decades for your conversion to simply break-even in terms of net present value. Please see the spreadsheet I provide on my website for how to do the calculation. As you’ll see in that spreadsheet, for married couples in 2021, total income (RMDs plus Social Security plus other income) has to exceed about $200,000 to be taxed at any rate higher than 22%. That’s a high hurdle, and it gets higher every year as tax brackets adjust for inflation.

“I use my Roth as a sort of trust fund for my daughter, now in her 40s. Due to the change in the tax law, she will have to cash it out within 10 years of my death, but she will never pay income tax on it, as she would on an inherited traditional IRA. That is likely to save her far more than the tax I paid on the conversions.”

McQuarrie’s response: I’m not sure you’ve taken the time value of money into account here. Let’s assume your daughter inherits in 20 years and the traditional IRA in her hands would have been taxed at about the rate you paid on the conversion. Instead, you chose to pass on to your daughter the tax-shrunken, post-conversion amount in your Roth account, who will pay no tax on it or the subsequent appreciation. But you also pass on the (negative) future value of the tax you paid to convert, which would have remained in the traditional IRA to appreciate. She probably will be better off, Roth conversions always pay off over multiple decade spans with roughly constant tax rates. But I challenge you to show in a spreadsheet that the conversion will save her “far more than the tax I paid,” in net present value terms.

“You failed to mention the moment in life when many people would in fact benefit from a Roth conversion. I am recently retired, have a small pension, am not yet taking Social Security, and am about seven years away from RMDs. But I have a nice fat IRA. When those RMDs hit I will face a huge tax bill plus much higher Medicare premiums. For the next few years it seems like a Roth conversion each year would be a wise move. I’ll pay tax on the amount converted at a far lower rate than I will pay on RMDs.”

McQuarrie’s response: Your age and situation were the exact focus of my paper. Let’s be specific about your “nice fat IRA.” If single, is it over $1.2 million ($2.4 million if married)? If not, then projecting forward seven years, you will not have to pay even the first level of Medicare surcharges, and you will only be in the 22% tax bracket, which I don’t consider “huge.” Nonetheless, if you can convert within the 12% bracket today, the upper income limit for which is about $52,000 for a single taxpayer, then indeed a Roth conversion will pay off in not too many years. That $52,000 conversion will reduce your first year RMD by about $2,500, saving you over $500 in income tax at the 22% rate, and these savings will continue in subsequent years as well. But what funds would you live on during that year you converted? If you have any taxable income at all (e.g., your pension), then you will not be able to convert as much as $52,000, which means you will save less than $500 in income tax.

Your article on Roth conversion left out one important issue: A traditional IRA distribution in retirement can make more of your Social Security benefits taxable resulting in a 12% rate being effectively more like 20%. A Roth on the other hand does not cause more of your Social Security payments being taxed. This can benefit lower income taxpayers more than is apparent when overlooking the Social Security Tax issue.

McQuarrie’s response: You make a good point: Your effective tax rate in retirement will be higher if your income rises enough to cause some of your Social Security benefits to become taxable. If you can do a Roth conversion today at 12%, to save 20+%, of course that will pay out, and relatively soon. However, what funds will you use to live on during the conversion year? Every taxable dollar of income reduces the amount you can convert at 12%. And can you convert enough at 12% to make a difference? (To get even a $1,000 reduction in your first year’s RMD will require about $18,000 to be converted at age 65.)

The bottom line I draw from this discussion? The wisdom of a Roth conversion, or lack thereof, is not something you can figure out on your own by using simple rules of thumb. You need to run the numbers. Be my guest.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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