It’s back-to-school season — and while the kids are loading up their backpacks, it’s not a bad time for us adults to learn something new, too.

One topic we’ve been talking about a lot lately is the Roth conversion. If you’re not familiar, this is simply the process of moving money from a traditional IRA or other pre-tax retirement account into a Roth IRA. You’ll pay taxes on what you move now, but from then on, your money can grow tax-free — and future qualified withdrawals are also tax-free.

People often consider this if they think their tax rate today might be lower than it will be in the future. But there are other benefits too, like reducing future required minimum distributions (RMDs) and having more flexibility with withdrawals in retirement.

The “Opportunity Cost” Argument

One of the most common objections we hear goes something like this:

“If I pay the taxes now, I’m losing the chance to invest that tax money and let it grow.”

On the surface, it makes sense — but here’s why that’s not necessarily true.

A Quick Example

Let’s say you have $100,000 in a traditional IRA and you’re in the 22% tax bracket. If you convert that full amount to a Roth IRA, you’ll owe $22,000 in taxes today.

If your tax rate in retirement is the same 22%, the math works out so you’re investing the same amount of after-tax dollars whether you pay the tax now or later. In other words — you’re not missing out on future growth just because you pay the tax upfront.

When a Roth Conversion Can Shine

The real advantage comes in if:

• You expect tax rates to be higher down the road.
• You want to reduce RMDs later in life.
• You like the idea of leaving tax-free assets to your heirs.

And with Roth IRAs, you can take out your contributions anytime without taxes or penalties, making them more flexible than many people realize.

A Balanced Look — Pros & Cons of Roth Conversions

Potential Advantages:

• Qualified withdrawals in retirement are tax-free.
• No RMDs for the original account owner.
• Can help lower your taxes later in retirement.
• May leave tax-free assets to heirs.

Possible Drawbacks:

• Taxes are due now on the amount you convert.
• A large conversion could raise your income for the year, possibly affecting Medicare premiums or tax credits.
• If future tax rates end up being lower, you may have paid more than you needed to.

Learn More

We’ve put together a free guide from our friends at Ed Slott & Company: “Roth Conversions – Why the Opportunity Cost Argument is Invalid.”
[Click here to download your copy.]

And if you know someone who’s been debating whether to convert, feel free to share this with them — it may help them see the bigger picture.

Disclaimer:
This is a hypothetical example for illustration purposes only. Your results will vary based on factors such as investment performance, tax rates, and timing of withdrawals. This is not intended as specific tax or investment advice. Please consult a qualified tax professional before making any decisions.