Should I keep my IRA or convert to a ROTH?
September 21, 2026 (updated 2026/10/10) - Technology Blog Index
duckware.com/roth
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1. The core IRA vs ROTH choice
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Background:
A traditional IRA is untaxed money that is growing tax-free. Then, after 59½
to avoid a 10% penalty
you can start withdrawing money from the IRA, but withdrawals become income
which must be taxed. Then, at a certain age around 76,
the goverment forces you via RMD
required minimum distributions
to start withdrawing a certain small percentage every year. Once you die, any remaining
IRA passes along to your beneficiaries
make sure you have beneficiaries setup in every IRA!,
but they must drain with IRA within 10 years, which again, is income which must be taxed at the benificaries
marginal tax rate! So planning ahead NOW is crucial for passing the maximum amount of wealth along.
The choice:
You have enough money to live on in retirement and have a sizable IRA that you want to leave
to your children when you die. Which option should you choose:
OPTION 1 (pay taxes later): Continue to let an IRA grow tax-free, building up
a nest egg, and then after death, your beneficiaries must drain the IRA over ten years
and pay taxes on the withdrawals as 'regular income'.
-OR-
OPTION 2 (pay taxes now): Perform ROTH conversions now if over 59½,
converting a substantial part or all of an IRA into a ROTH IRA over 15 to 20 or so years, but
paying taxes now on each conversion, growing a nest egg where ALL of the money can be
withdrawn tax-free beneficiary must withdraw everything within 10 years!
Q: Which option will yield the most 'after-tax' money for your beneficiaries?
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2. The short answer (for which option is the better choice)
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★ The key factor that matters is the 'tax rate' you have to pay now to ROTH convert, vs
the tax rate that your beneficiaries must pay later on IRA withdrawals. Whichever
tax rate is lower 'wins' and that is the choice that you should make.
Surprisingly, it does not matter what the 'principle' amount is nor does it matter what gains
or losses there are each and every year. Instead it all boils down to which
option option 1 or option 2 in above section results in the lowest tax rate used.
Lowest tax rate paid now vs later is the correct choice but do see end of article for other considerations.
For high value IRA's, you have the potential to leave 27% more money to your beneficiaries if you make the right choice.
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3. The long answer (paying ROTH conversion taxes with IRA money)
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Ending IRA Value:
Say you have an IRA with V amount of money. Say the gain in the first year is G1 percent, meaning that
at the end of the first year, the IRA value is now V×(1+G1). Now repeat for the second year and the value
of the IRA is now V×(1+G1)×(1+G2). Keep repeating for any number of years 'N' and the value at the end
of N years is V×(1+G1)×(1+G2)×...×(1+GN). And then, at the end, you need to pay some tax rate
IraTaxRate. So, after years of growth and finally taxes, the ending 'in-your-pocket' after taxes IRA value is:
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(V×(1+G1)×(1+G2)×...×(1+GN)) × (1-IraTaxRate)
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Ending ROTH Value:
Say you have an IRA with V amount of money and you decide to ROTH convert and your tax rate is RothTaxRate.
Your ROTH now has V×(1-RothTaxRate) dollars in it. And growth year over year will be exactly the same as above.
After initial taxes, and then years of growth, the ending 'in-your-pocket' after taxes ROTH value is:
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(V×(1-RothTaxRate)) × (1+G1)×(1+G2)×...×(1+GN)
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Compare these two 'in-your-pocket' values: But now let's compare these two 'after-tax' values
by dividing ROTH value by IRA value. If ROTH is better, this computation will be greater than 1.
If ROTH is worse, this computation will be less than one. Dividing we get:
(V×(1-RothTaxRate)) × (1+G1)×(1+G2)×...×(1+GN)
----------------------------------------------
(V×(1+G1)×(1+G2)×...×(1+GN)) × (1-IraTaxRate)
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But there are so many common terms in both the numerator and denominator that simply cancel each other out that
the only terms remaining are a comparison of the tax rates:
(1-RothTaxRate)
---------------
(1-IraTaxRate)
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The result: If the numerator is larger than the denominator, then ROTH wins.
If the denominator is larger than the numerator, then IRA wins.
The answer: Whichever 'tax rate' is lower, causes that term to be larger than the other term,
and for that option to then win!
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4. The long answer (paying ROTH conversion taxes with taxable money)
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When you do a ROTH conversion, it is best to pay the conversion taxes with taxable money.
Because if you use IRA money to pay the taxes and have the taxable money available, you are
effectively converting some tax-free money to taxable money, which is the total opposite of
what you need to do.
To shorten formulas, let's define "GF" to mean the 'Growth Factor' over all years
same definition as section above:
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GF = (1+G1)×(1+G2)×...×(1+GN)
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Ending ROTH value: To start with, we have an IRA with value "V", and if we decide
to perform a ROTH conversion, with a tax of V×RothTaxRate paid up-front from outside-IRA taxable money,
then after years of growth, the ending 'in-your-pocket' after taxes ROTH value is:
Ending IRA Value: To make a fair comparison to ROTH above, we need to start with the same
amount of money, which is the tax-free IRA, plus a taxable amount of money equal to ROTH conversion taxes that
would have been owed, V×RothTaxRate.
The IRA of value "V" will grow over years and then must be
taxed at an IraTaxRate. The ending value is "V×GF×(1-IraTaxRate)".
The taxable money component, which has also grown over the same numbers of years at the same rate,
is "V×RothTaxRate×GF".
So, after years of growth, the ending 'in-your-pocket' after taxes IRA value is:
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V×GF×(1-IraTaxRate) + (V×RothTaxRate)×GF
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Compare these two 'in-your-pocket' values: We divide the ROTH 'in-your-pocket' value
above by the IRA 'in-your-pocket' value above left as an exercise for the reader,
and the result is:
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1/(1-IraTaxRate+RothTaxRate)
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Again, initial IRA value and growth or loss over the years all cancel out and the only thing
remaing to compare are the two tax rates. The tax rate either paid up front or the tax rate
paid at the end. And again just like in the section above, lowest tax rate 'wins'.
NOTE: The goal of this section was to clearly show that the 'lowest tax rate wins' principle
still applies, even when paying ROTH conversion taxes with taxable money. But do take note
that taxes would be owed on the taxable money every year decreasing its value, which the above
discussion ignores. Once taxes on taxable money is factored in, that tilts the scales favoring ROTH
conversions even more.
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5. Multiplication is commutative
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Multiplication is commutative. Namely, a × b = b × a
This is why the following two situations yield exactly the same monetary value:
- tax something up-front and then have years of gains/losses
- have years of the same gains/losses for the same something and then apply the same tax rate
But do keep in mind, that in the second case, you may very likely be more impacted by tax bracket
issues, which in turn impacts/increases the effective tax rate that you must account for.
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6. IRA vs ROTH implications
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For high-value multi-million dollar IRA's, the impact on beneficiaries can be substantial who are forced to drain inherited IRA's within ten years,
as withdrawals are 'ordinary income', often pushing beneficiaries into the 37% Federal
tax rate bracket. If you are a retiree over 59½ with little to no income, the tax rate you will
pay on ROTH conversions now should be well below 37% and hopefully around an effective rate of 20%, so
it is better to convert to ROTH now to lock in a 'low' tax rate.
For low-value IRA's, again, it all comes down to which option still results in the lowest tax rate.
You paying taxes now, or you or your beneficiaries over ten years paying taxes later.
And figuring this out can be complex, but well
worth the time to make a best case estimate. Often times, knowing a beneficiary has a great job
and is a high earner makes the decision for you (they would pay a much higher tax rate, so ROTH convert now).
If you need the entire IRA to fund your retirement, then the goal is to withdraw enough money each
year so that your effective tax rate for every year you are alive is roughly equal.
A high-value IRA example: A 60 year old retiree with a large multi-millions IRA and no income/salary
and children doing well. It makes a lot of sense
for this retiree to perform a large ROTH conversion each and every year over 15 to 20 years, and delaying social
security as long as possible. Use ROTH money as needed to live within reason, but the goal is to
pay 20% or less federal tax
on ROTH conversions having the entire IRA converted to a ROTH before death. This will result in
your beneficiaries receiving up to 27% more money via a tax-free ROTH than a taxable IRA.
Because the comparison in this situation is between you paying 20% federal tax now vs your beneficiaries
having to pay 37% federal tax later. The result is that (1-0.20)/(1-0.37), or 0.80/0.63, or 1.27,
or 27% more money in after-tax value can be passed along to your beneficiaries.
When using outside-IRA taxable money to pay conversion taxes, the benefit is around 20% more money.
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7. Other ROTH conversion considerations
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Performing ROTH conversions does not happen in isolation. There ARE many other factors to
consider as well, which can complicate the decision:
- IRMAA: The impact that a large income due to ROTH conversions will have on medicare premiums and the two year lookback
- All other sources of income (salary/investments/social security/etc) in retirement
- Deciding when (early/on-time/late) to take social security will impact your ROTH conversion plans
- Understand when IRA RMD required minimum distributions will kick in and their impact see paragraph below
- Be aware of the various ROTH five year rules (greenleaftrust.com)
- Future unforeseen tax code changes could alter today's assumptions, especially like this
"will Roth IRAs eventually become taxable?" (carrolladvisory.com) article
RMD: RMD required minimum distributions means that you are being forced to convert tax-free money
eg: an IRA into taxable money. It means that you likely had a prior opportunity
to ROTH convert earlier to keep that money tax-free, but did not act. Now if you need
that money to live on, that is great and OK to do. But if that RMD money is just put into a taxable investment for
your beneficiaries, than that is a missed opportunity.
A fast/good 'mental-math' estimate of the RMD factor is to simple subtract your age from 100.
For example, what is the RMD factor for age 80. A guess is 100-80, or 20. The real factor is 20.2.
At 80, your RMD is 1/20.2, or 4.95%, of your IRA value.
Dollar cost averaging: Plan on investing the same amount of money each and every month into
investments. When the market is down, you are buying more shares. When the market is up, you are
buying fewer shares.
Rather than timing the market, just invest in the market on a very regular basis,
like with every paycheck.
Realize the power of compounding interest over decades: Put the maximum amount allowed
by law into retirement accounts every year to leverage the power of compounding interest.
This means max out work 401(k) plans and contribute the maximum amount to a Roth account every year.
If you are not doubling your investment money once every 8 to 10 years, invest in something else.
But over 30 to 40 years, you are expected to double your money four or more times, which
means 16× to 32× your initial investment. All from compounding interest.
For example: $1000, earning 8% every year in a retirement account for 40 years will turn into $21,724.52.
In Excel, this is "=1000*POWER(1.08,40)".
Let's put things into perspective. Over a lifetime, you should earn MORE from investing and compounding
interest than you do from your job and your salary. Treat investing like your second job,
because in a sense, it ultimately will pay you just as much as your first job.
Use a 'Brokerage' account: Have your IRA / ROTH in a brokerage account. This way you can buy/sell almost
anything with NO tax consequences. Namely, you can actively trade within a retirement account
without worrying about the tax impact!
The corollary of this is that your taxable investments should be held in stocks that you intend to hold
onto long term, and stocks that do not pay dividends
instead, they 'grow' via increased share price.
Try to keep income producing investments held
in your IRA / ROTH.
Buy/Sell Anything:
In a brokerage account, you can buy/sell almost anything. If it has a ticker symbol, you can almost
certainly buy/sell it.
Same-day ACH:
I personally use Fidelity (fidelity.com), which has no-fee
brokerage accounts. And amazingly, ACH transfers not wire transfers, but normal
ACH transfers at a Fidelity brokerage account to/from my bank account are free and complete
the same business day!
Cash earns 'money market' rates:
Also, most brokerage accounts allow for cash just sitting around to earn a very competitive money market rate.
Compare that a virtually all bank accounts, where the interest rate in comparison
is really poor.
CD's: Another reason to use a brokerage account is that if you purchased a CD and need to access
that money immediately, you can sell the CD on the secondary market within 15 minutes
during market hours, and at a competitive market price. Try doing that with your bank CD
where you likely will face a penalty for accessing a CD before maturity!
Named beneficiaries: Every account you have with money bank accounts, IRA's, etc
should 100% have a named beneficiaries,
as upon your death, those assets will transfer directly to the named beneficiaries, bypassing probate.
But also be aware that having 'named beneficiaries' takes priority over and above whatever
your will says to do with this asset. Any account with 'named beneficiaries' ignores what
your will says!
Trusts: Consider using a trust to help your estate bypass probate upon your death. Real
Estate properties are often held in a Revokable Living Trust that spells out in detail what to
do with the property upon death again, a warning, bypassing what a will says.
You just need to find the right lawyer. Some will want a percentage of the assets placed
into trust, while others will just charge a flat or hourly rate. Alternatively, there are
websites out there that allow you to create your own trust. You will still likely need a
lawyer to file the proper deeds with the county transferring the property into your trust.
Also, notify insurance companies of the 'new owner' of the property your trust, not you.
Stepped up cost basis upon death: Remember that investments that appreciate and don't pay
any or little income are a great way to pass along wealth because at death, your beneficiaries
get a 'stepped up' cost basis the value of that asset on the day of death. Another way
of looking at this is at death there is a 0% tax on long term capital gains!
BUT, understand that any retirement accounts with pre-tax money do not get a step up in cost basis.
Instead any withdrawals are considered 'income'. This is why it is so important to try to
convert IRA's to Roth IRA's now, but only if it makes financial sense
that you believe you will pay less tax now than you or your beneficiaries will pay later.
Income vs Capital Gains: Take the time to understand the difference between how the
federal government taxes income vs capital gains. It will impact your investment decisions.
For example, you are just out of college and starting a new job. You are making money and
just starting to invest and buy some Amazon stock. It is possible at the end of the year
that you could sell your Amazon stock held for more than a year, and then buy immediately back Amazon stock,
realizing a long term capital gain LT CG, and then pay NO tax on the gain, thereby 'stepping up'
the cost basis you have in the stock. Now admittedly, your salary may be too
high to take advantage of this strategy, but knowing what is possible will make you
a better manager of your own money.
Fully understand the impact of the IRA ten-year rule: When you die and your retirement accounts pass along
to your beneficiaries, your beneficiaries MUST empty the inherited IRA within ten years. And if
your IRA is is a standard IRA and not a Roth IRA, then that means more income and more taxes.
For low-value IRA's, this impact may be minimal. For high-value IRA's, the impact WILL be substantial.
Make sure your beneficiaries understand this ten-year rule. They will pay the least amount of tax if they can
drain the inherited IRA in a way such that their total income for each of the ten years is as equal/even as
possible. And this is can be complex to accurately compute, especially if the beneficiary's income is highly
variable, plus the fact that 'return on investment' on the inherited IRA in future years is unknown.
IRS Section 1202: If you invest in yourself and start a small company and hope to eventually sell all/part of it,
be aware now, before you form your company, about Section 1202 of the Internal Revenue Code that allows
non-corporate taxpayers to exclude up to 100% of capital gains from federal income tax on the
sale of Qualified Small Business Stock QSBS. Knowing that this is possible now
may alter how you form your company.
QCD: A Qualified Charitable Distribution (QCD) is a direct, tax-free transfer of funds from
an IRA to a charitable organization, that counts towards reaching your RMD.
Gifting appreciated assets: If you intend to make a large donation to charity, don't give
a large cash donation. Instead, gift highly appreciated assets, like stock.
You get the benefit of claiming the entire value (cost basis AND long term capital gains) as a gift,
and the charity receives the entire value. The LT CG on the stock is not taxed.
This entire paper is based upon my own personal experience. Only use it as a starting point for your own research.
And, as always, it is always recommended that you consult with a financial planner before making any financial
decisions -- to make sure that you have not overlooked something unique to your financial situation.
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