When Should You Consider a Roth Conversion? Vanguard Has an Answer

Deciding between a traditional individual retirement account (IRA) and a Roth IRA can be difficult. Choosing when, or if, you should convert your IRA funds to a Roth account can be even more daunting. Experts commonly recommend that investors compare their current and future marginal tax rates to decide, but future tax rates can be highly uncertain and many investors are left wondering whether they made the right choice. Now, investment giant Vanguard has a more precise answer. Here’s how calculating your break-even point can pinpoint whether a Roth conversion makes sense for you.

A financial advisor could help you save for retirement and select investments that align with your long-term goals.

What Is a Roth Conversion and How Does It Work?

A Roth conversion allows you to move money from a pre-tax retirement account, like a traditional IRA or 401(k), into a post-tax Roth IRA. The key difference is how the IRS treats your contributions and withdrawals. With a traditional IRA, you generally contribute pre-tax dollars and pay income tax when you withdraw funds in retirement. With a Roth IRA, you contribute after-tax dollars but enjoy tax-free growth and withdrawals later on, as long as you follow IRS rules on the timing of your distributions.

When you convert funds to a Roth, the amount you move is added to your taxable income for the year. You’ll owe income tax on the converted balance, but future earnings and qualified withdrawals will be tax-free. Many investors choose to pay the conversion taxes from a separate taxable account rather than from the IRA itself, which preserves more of the converted balance for future growth.

A Roth conversion can be done all at once or gradually over time. Full conversions transfer the entire balance in a single tax year, while partial conversions let you move smaller amounts each year. Many financial advisors recommend partial Roth conversions as a way to spread out the tax impact and avoid pushing your income into a higher bracket.

Vanguard Finds the Ideal Tipping Point for a Roth Conversion

Typically the rule of thumb is that Roth IRAs are most beneficial if an investor expects to be in a higher tax bracket upon retirement, since Roth contributions are taxed at the current rate and distributions are tax free. As such, Vanguard experts say that “assessing the current tax rate and expected future tax rate is a good first step” in determining whether you should convert your retirement savings to a Roth account.

However, sometimes a Roth conversion can be beneficial even if your future tax rate declines instead of increases. So rather than a straightforward tax rate comparison, the firm recommends conducting a dynamic Break-Even Tax Rate (BETR) analysis to determine if a conversion is right for you. Calculating a BETR analysis offers investors an approach that simplifies the decision-making process.

“If your future tax rate is at the BETR, conversion wouldn’t make a difference,” Vanguard analysts explain. “Simply put, the BETR shows how far your tax rate would have to fall to make conversion undesirable.”

If an investor’s future tax rate is higher than a calculated BETR, generally a Roth conversion would make sense financially. Even if an investor’s future marginal tax rate is lower than it is currently, certain scenarios can lower a BETR and make a conversion far more attractive than it would otherwise seem in a straightforward rate comparison. This could potentially save an investor thousands of dollars.

For instance, if you’re able to pay Roth conversion taxes from a taxable account, such as your standard brokerage account, the full value of your IRA can move to the Roth account. By not paying the conversion taxes from the IRA but with other portfolio funds, you can lower your BETR substantially. Vanguard calculates that, if an investor pays a current 35% marginal tax rate and expects to pay the same in retirement, converting to a Roth and paying taxes from a tax-efficient portfolio could lower the BETR to 29.6%. If taxes were paid from a tax-inefficient portfolio, where the investor has to pay annual taxes on investment returns, the BETR falls even further to 23.5%. As a result, a Roth conversion suddenly becomes rather appealing.

Another scenario where a BETR analysis helps is when an investor’s traditional IRA includes a non-taxable basis. When traditional IRAs are converted to Roth IRAs, only the pre-tax balance is subject to income tax. Vanguard research indicates that the greater the non-taxable basis, the lower the BETR, and the more advantageous a Roth conversion becomes. Similarly, when an investor opens a backdoor Roth and intends to contribute more to it over time, the BETR drops and makes a conversion even more beneficial.

How Retirement Savers Can Take Advantage

At its most basic, a BETR is the future tax rate at which the after-tax withdrawal value is equal in both a no-conversion and conversion scenario.

As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left until retirement, at which point you expect to be in the 24% tax bracket.

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000.

Then you calculate the Roth conversion potential. Again, that same $100,000 can triple over 20 years. However, now you take the $35,000 that you’d currently pay in Roth conversion taxes (from your tax-inefficient portfolio) and estimate that, accounting for annual taxes on interest and capital gains, that $35,000 would have doubled over that same time period. As a result, the final after-tax withdrawal value after a Roth conversion would be $230,000.

Plugging those values into the Vanguard formula gives you a BETR of 23.3%: $300,000 * (1 – BETR) = $230,000.

In a straightforward rate comparison, you would not do a Roth conversion, since your current marginal tax rate of 35% is higher than your future tax rate of 24%. However, the BETR method indicates that it may actually be a good idea since the future rate of 24% is still higher than the calculated BETR of 23.3%. Of course, if you paid your Roth conversion taxes with the IRA funds and not from a separate brokerage account, the BETR would change and, in that scenario, a conversion may no longer make sense.

Tax Considerations and Other Concerns 

While a Roth conversion can unlock long-term tax benefits, it can also trigger short-term financial consequences if not carefully planned. The biggest risk is that the conversion increases your taxable income for the year, potentially pushing you into a higher marginal tax bracket. This can also affect eligibility for certain credits or deductions.

Another often-overlooked factor is Medicare’s Income-Related Monthly Adjustment Amount (IRMAA). If you’re 65 or older, a higher reported income from a conversion can increase your Medicare Part B and Part D premiums two years later.

State taxes can add another layer of complexity. Some states don’t tax IRA withdrawals, while others do, meaning a conversion could cost more depending on where you live or plan to retire. Timing also matters: completing a conversion before year-end gives you flexibility to estimate and manage your tax liability, while waiting too long can limit your ability to adjust. Because of these moving parts, it’s often wise to run multiple tax projections or consult a tax professional before proceeding.

Roth Conversion Mistakes That Could Cost Thousands

The most expensive mistake is converting too much at once. Every dollar you convert counts as taxable income for the year, and once that income pushes you into a higher bracket, you are paying a steeper rate on every additional dollar. Someone who converts $200,000 in one shot might jump from the 24% bracket into the 32% or 35% range, handing over thousands more than necessary. Spreading that same amount across four years at $50,000 each could keep you in the lower bracket every time. Before you convert anything, figure out exactly how much room you have in your current bracket and stop there.

Paying the tax bill out of the IRA itself is the second mistake, and it is more costly than most people realize. If you convert $100,000 and withhold $25,000 from the account to cover taxes, only $75,000 makes it into the Roth. That missing $25,000 never gets to compound tax-free. At 7% annual growth over 20 years, that is roughly $97,000 in lost future value. And if you are under 59 and a half, that withholding also gets hit with a 10% early withdrawal penalty on top of the income tax. Pay the tax from a separate checking or brokerage account so the full amount stays inside the Roth where it belongs.

Medicare premiums are a cost that blindsides a lot of people mid-conversion. Medicare sets your Part B and Part D premiums based on your income from two years prior. A big conversion in 2026 means higher premiums in 2028, potentially by several thousand dollars depending on which IRMAA surcharge bracket you land in. If you are 63 or older, run the IRMAA numbers before you convert. A move that saves $5,000 in future taxes but triggers $4,000 in extra Medicare costs over two years is barely worth the paperwork.

Converting while you are still earning a full salary is another missed opportunity. The best window for most people is the gap between retiring and the start of Social Security or required minimum distributions. During those years, your income drops and your lower tax brackets are sitting partially or fully empty. You can fill them with converted dollars at a much lower rate than you would pay while still working. Stacking a conversion on top of peak earning years means you are paying the highest possible rate on money you could have moved over later for less.

State taxes are the layer that gets forgotten most often. If you live in a high-tax state now but plan to retire somewhere with no state income tax, converting before you move means paying a state tax bill you could have skipped entirely. On a $100,000 conversion in a state with a 6% rate, that is $6,000 gone for no reason. If the move is already in your plans, waiting to convert until after you relocate is one of the easiest saves available. It does not change the federal math at all, but it keeps the state from taking a cut it did not need to get.

Bottom Line

Vanguard’s break-even tax rate analysis, or BETR, is one of the better tools available for pressure-testing whether a conversion actually makes sense in your situation. Rather than just comparing your tax rate now to what you think it will be in retirement, BETR factors in how a conversion ripples through the rest of your finances. It is a moving number that shifts depending on your income, your deductions and other decisions you are making in the same year, which means it can catch savings or costs that a simple side-by-side rate comparison would miss.

“Tools like Vanguard’s BETR analysis can help you determine whether and when to start conversions from a traditional 401(k) or IRA to a Roth account. Conversions are a great strategy to help smooth out your tax bill over time by bringing forward some of the RMD income you expect to withdraw later,” said Tanza Loudenback, CFP®.

Running the numbers yourself is a reasonable place to start, especially if your situation is fairly straightforward. But if the results raise questions about timing, conversion amounts or how it interacts with Medicare premiums or Social Security taxation, that is where a financial advisor earns their fee. They can map the conversion into your full tax picture and help you avoid the kind of mistakes that turn a smart strategy into an expensive one.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Retirement Planning Tips

• Not sure if a Roth IRA or Roth conversion can help you save more for retirement? For a solid financial plan, consider speaking with a financial advisor. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.

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