Roth Conversion

Weighing a Roth Conversion’s Tax Trade-Off

Converting a Traditional IRA or 401(k) balance to a Roth means paying income tax on the converted amount now, in exchange for tax-free growth and withdrawals later — and whether that trade is worth it depends heavily on where the conversion tax bill actually gets paid from. Enter the amount you’re considering converting, your current and expected future tax rates, how many years until withdrawal, and whether you’d pay the tax from outside savings or from the converted funds themselves, and this calculator compares the after-tax result of converting against simply leaving the balance where it is.

This is distinct from the Roth vs. Traditional IRA Calculator calculator, which compares NEW contributions going forward rather than converting an existing balance.

The Formula

$$\vB{\text{Conversion Tax}} = \vA{\text{Conversion Amount}} \times \vD{\text{Current Tax Rate}}$$ $$\vC{\text{Future Value (Converted)}} = (\vA{\text{Conversion Amount}} - \text{Tax, if paid from converted funds}) \times (1+r)^n$$ $$\text{Future Value (Not Converted)} = \vA{\text{Conversion Amount}} \times (1+r)^n \times (1 - \vE{\text{Future Tax Rate}})$$

Worked Example

Converting $50,000 at a 24% current tax rate, expecting a 22% rate in 20 years at a 7% annual return:

• Tax paid from outside funds: The full $50,000 keeps growing tax-free, reaching about $193,484 in 20 years. Left unconverted, the same $50,000 grows to about $193,484 before tax, or about $150,918 after paying 22% tax at withdrawal. Converting wins by about $42,567.
• Tax withheld from the converted funds: Only $38,000 actually makes it into the Roth (after paying $12,000 in tax), reaching about $147,048 in 20 years — in this case, not converting wins by about $3,870, since less principal was left to grow tax-free.

Key Factors to Consider

• Paying the conversion tax from outside savings, rather than from the converted amount itself, is generally the more favorable approach when it’s an option. As the worked example shows, keeping the full converted balance growing tax-free (rather than shrinking it to cover the tax bill) is a significant advantage — this is one of the most important practical decisions in a real Roth conversion, beyond the tax-rate comparison itself.
• A Roth conversion is more likely to make sense when your current tax rate is lower than your expected future rate, and less likely to make sense in the reverse case. Since the whole trade is “pay tax now instead of later,” converting is generally favorable when today’s rate is the lower of the two — which is exactly why many people consider conversions during a temporary lower-income year, like early retirement before Social Security or pension income begins.
• A large conversion can push income into a higher tax bracket for that year, changing the effective tax rate on the conversion itself. Converting a very large balance in a single year can bump some or all of the converted amount into a higher marginal bracket than expected — spreading a large conversion across multiple years is a common strategy to manage this.
• Roth conversions have no income limits, unlike direct Roth contributions. This is exactly what makes a “backdoor Roth” strategy possible for high earners who can’t contribute to a Roth IRA directly — see the Backdoor Roth Calculator for how that specific strategy’s pro-rata rule works when the account being converted includes both pre-tax and non-deductible contributions.

Common Mistakes

• Assuming the converted balance will still be worth the full amount when it lands in the Roth. If the conversion tax is paid from the converted funds themselves, only what’s left after tax actually grows tax-free — as the worked example shows, this can flip which option wins.
• Ignoring the effect a large conversion has on that year’s tax bracket. Converting enough in one year can push part of the amount into a higher marginal bracket than the flat rate entered here assumes — spreading a conversion across several years is a common way to manage this.
• Comparing only the tax rates without accounting for the number of years until withdrawal. A small rate advantage matters far more over a long growth horizon than a short one, since it compounds along with the balance itself.

Useful to Know

• Deciding between converting an existing balance versus making new contributions? Roth vs. Traditional IRA Calculator compares Roth versus Traditional for contributions going forward.
• Earn too much to contribute to a Roth IRA directly? Backdoor Roth Calculator walks through the backdoor Roth strategy and its pro-rata rule.
• Converting a Traditional account that’s already required to take distributions? Required Minimum Distribution (RMD) Calculator estimates the required minimum distribution a converted account would otherwise still owe.