Roth Conversions — Not the Best Solution for Many Households

Suppose you've built significant wealth in tax-deferred retirement accounts such as 401(k) and Traditional IRAs. The big question looms: Should you convert to a Roth, pay taxes now, and avoid potentially higher taxes later?

For many households, the answer is often "not so fast." There are other solutions and converting funds to a Roth IRA or 401(k) at a high tax rate might be a mistake.  Often converting to a Roth at a low tax rate can still be a mistake.

When Should You Do Roth Conversions?

Roth conversions can be a powerful move if you’re temporarily in a relatively low tax bracket—especially if you retire early and have a lower income before Social Security and Required Minimum Distributions (RMDs) from tax deferred accounts.

Example: A couple retires at 60 with $40K in taxable income prior to SS and RMDs. They could convert $50K–$70K of IRA assets per year at a low tax rate (possibly for 10 years if they delay claiming SS until 70), building a tax-free bucket for the future when they expect to be in a higher bracket.

When Should You Not do Roth Conversions?

👉 Roth conversions almost never make sense if you expect to remain in a low tax bracket throughout your retirement.  Don’t pay taxes before you have to.

👉 If you are in a higher tax bracket and are charitably inclined there may be better strategies than converting to a Roth IRA or 401(k).

👉 Never convert if it will result in "Negative Tax Arbitrage". "Negative Tax Arbitrage" is defined as paying a higher tax rate today on a Roth conversion (e.g., 24% or 32%) than the rate you or your heirs would pay on future withdrawals (e.g., 10%, 12% or 22%).

Who Should Avoid Roth Conversions?

Person / Scenario	Why Roth Conversions Fail
Pre-65 Retirees in 22% or higher tax brackets	May trigger loss of ACA/Obamacare health insurance subsidies. May also trigger IRMAA surcharges if age 63+.
Pre-65 Retirees expecting to remain in a very low tax bracket in retirement.	Minimal to no tax saving by doing Roth conversions if future tax rates are expected to be low.
High Earners (32%+ tax brackets)	Pre-paying taxes at a peak rate instead of deferring to lower tax retirement years.
Charitably Inclined	IRAs are better used for QCDs, which eliminate the tax entirely.
Heirs in low tax brackets	If your children or grandchildren will be in a lower tax bracket than you, it is more tax-efficient for them to inherit the remaining IRA and pay taxes at a lower rate later.

Hidden Costs of Roth Conversions

The Medicare Surcharge Cliff (IRMAA)	A Roth conversion that pushes you $1 over a threshold can trigger a $1,000+ annual premium increase two years later.
The Social Security Tax Torpedo	When a Roth conversion causes up to 85% of your Social Security to become taxable income.
The ACA Subsidy Cliff	For retirees under 65, a Roth conversion can lead to a 100% loss of health insurance premium tax credits.
The NIIT Penalty	The Net Investment Income Tax is a 3.8% surcharge on some or all investment income for higher income taxpayers. An IRA conversion may trigger the 3.8% Net Investment Income Tax on some or all of the taxpayer's investment income.

What are Tax-Smart Charitable Strategies for Higher Tax Brackets?

If you're in a 22% or higher tax bracket, the math changes. Here are some strategies that may be a better fit for those who are charitably inclined:

1. Qualified Charitable Distributions (QCDs) vs. Roth Conversions

Starting at age 70½, you can give directly from your IRA to charity. The 2025 limit is $108,000 per person.

This is a powerful move because it:

• Satisfies all or part of your Required Minimum Distribution (RMD).

• Reduces your taxable income, which can also lower your Medicare premiums.

• Puts your money directly to work for a cause you care about.

A Roth conversion reduces future RMDs by paying taxes today at your current tax rate; a QCD reduces current and future RMDs, paying zero taxes ever on those amounts given to charity.

Example: A 75-year-old couple with a $2M IRA has a required $81K RMD. If they don’t need all of the RMD to fund their expenses, by donating $50K to charities via QCDs, they cut their taxable RMD by over 60% while making a big impact.  They can repeat this process multiple years to avoid taxes and benefit the causes they care about.

2. Charitable Bequests 

You can leave part or all of your traditional IRA to charity through beneficiary designations. This is incredibly tax-efficient because charities are tax-exempt and won't pay the income tax your heirs would face.

Example: Instead of leaving a $1M IRA to your children (who could lose 30–40% in taxes), leave some or all of the IRA to a charity. Then, give your heirs Roth IRAs, real estate, and taxable brokerage assets that receive a step-up in cost basis at your death. The result: more impact for charity and a more efficient inheritance for your family.

3. The Tax-Offset Strategy: DAF + Roth Conversion Combo

This is a slightly more sophisticated strategy for higher-income, higher-net-worth households primarily before age 70½.

Bunching multiple years of charitable donations into one tax year (combined with state and local taxes and mortgage interest) can result in a large itemized deduction. One way to do this is to contribute a large amount of appreciated stock (or cash) to a Donor-Advised Fund (DAF) in a high-income year. You can then use the large itemized deduction to offset potential taxes from a significant Roth conversion.

Example: A 60-year-old couple in a 24% or higher tax bracket contributes $100K of stock to a DAF. If they pay $20K in state/local income taxes, $12K in real estate taxes, and $10K in mortgage interest, they will have a $142K itemized deduction that is about $110K more than the standard deduction.* They can then convert about $110K of Traditional IRA money to a Roth, using the itemized deduction to shield that conversion from tax.

By repeating this strategy over several years, you can shift a significant amount of wealth into a tax-free Roth with minimal tax pain, while fulfilling your charitable desires.

* Itemized deductions include charitable contributions plus state/local taxes, mortgage interest, medical expenses in excess of 7.5% of AGI. There are income-based limits to this strategy depending on whether the contribution was in appreciated assets or cash.  Also note that the IRA conversion may trigger the 3.8% Net Investment Income Tax on some of the converted funds.

The Roth Conversion Decision Tree

1. Is your current tax bracket significantly LOWER than your expected future retirement bracket?

• NO: 🛑 STOP.  You are likely committing "Negative Tax Arbitrage." (Exception: Estate planning for high-net-worth heirs).

• YES:  Proceed to Question 2.

  
  

2. Are you under age 65 and relying on ACA (Obamacare) subsidies?

• YES: ⚠️ CAUTION.  A conversion could trigger a "Subsidy Cliff," making your healthcare significantly more expensive.

• NO:  Proceed to Question 3.

  
  

3. Are you charitably inclined?

• YES:  Stop and consider QCDs or Charitable Bequests. These allow you to reduce your IRA balance and satisfy RMDs with zero tax, which is mathematically superior to a Roth conversion for the charitable portion of your wealth.

• NO:  Proceed to Question 4.

  
  

4. Do you have enough "outside" cash (in a brokerage or savings account) to pay the conversion tax?

• NO: 🛑 AVOID.  Using IRA funds to pay the tax on the conversion significantly reduces the benefit and may trigger early withdrawal penalties.

• YES: ✅ PROCEED.  This is a "Green Light" scenario for a Roth conversion.

The Bottom Line 

👉 Low tax bracket now, and expecting to stay in a low tax bracket?  Roth conversions are not a good move — just pay the taxes when you withdraw from the Traditional IRA. 

👉 Low tax bracket now, but expecting to be in a higher tax bracket later?  Roth conversions could be an excellent move.

👉 Higher bracket + charitable?  Instead of doing Roth conversions, consider QCDs, charitable bequests, or the DAF+Roth combo to maximize your impact and minimize your tax burden.

Key Takeaway: The goal is to maximize after-tax wealth, not just minimize RMDs. Prepaying a 24% tax today to avoid a 12% tax later is a net loss for your household.

At FlourishingPath Financial Coaching, I help households design charitable and tax-efficient strategies that align with their values and build a future they’re excited about. Learn how to use Qualified Charitable Distributions (QCDs) as a tax-free alternative to Roth conversions: "QCDs: The Tax-Smart Way to Give".

Contact me or visit www.flourishingpathfinancial.com/book-online if you would like friendly, expert assistance in designing tax-efficient charitable strategies or tax-efficient Roth conversion strategies.

Author:  John Macy, MBA, RICP®

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