Why Converting Everything to Roth Cost My Clients Six Figures
How converting too much, too fast creates a six-figure tax bill your advisor never mentioned
A couple walked into my office last spring. They were proud. They had done their homework. They had watched the videos, read the articles, and made a decision. A big one.
Over the previous 12 months, they had converted their entire pre-tax retirement accounts to Roth. All of it. Approximately $340,000 in a single tax year.
Their reasoning was completely logical. They had heard that tax rates were going up. They had heard that Roth accounts grow tax-free. They had heard that the smart move was to convert as fast as possible.
Every video said the same thing. Every article pointed the same direction. So they acted.
When we ran the full tax projection, mapping taxes paid today against taxes avoided over the next 20 years, the number appeared on the screen like a cold cup of coffee.
They had overpaid taxes by more than $80,000 compared to what a staged, strategic conversion plan would have cost them. And that was the conservative estimate.
A six-figure mistake, when you add in lost portfolio growth. Because someone on the internet said, “convert everything.”
That story is not unusual. I have seen versions of it more times than I want to admit. Roth conversions are one of the most misunderstood strategies in retirement planning.
Not because the concept is hard. Because the advice people get online strips the math out of the equation and hands them a slogan instead.
Let’s put the math back in.
“Roth is Better” is Not a Strategy. It is a Bias.
Go to any personal finance corner of the internet and you will find the same sentence repeated like a financial scripture: Roth is better.
Better than what? At what income? Over what time horizon? For what specific person in what specific situation?
Nobody asks those questions. They just say Roth is better, and people act.
Here is the actual logic behind a Roth conversion: you pay taxes on money now, at today’s known rate, rather than later at an unknown future rate. If your future rate is higher, you win. If your future rate is lower, you lost the bet and paid extra taxes early.
That logic is sound. In the right circumstances.
Think about it like buying fuel for a long trip. You hear that gas prices at your destination are going to be higher than they are today.
Smart move: fill up before you leave. Reasonable logic.
But if you drive to every gas station in your city, fill every gas can you own, and stack them in your garage, you have taken a reasonable principle and executed it into a disaster.
You spent $3,000 today protecting yourself from a price difference that only applies to what you actually need.
Converting a decade of retirement savings in a single tax year is the same mistake.
The principle is right. The execution ruins the math.
The $200,000 Portfolio Threshold Nobody Mentions
Here is the piece of guidance that does not make it into the YouTube videos or the personal finance podcasts.
Roth conversions are best suited for portfolios over $200,000 in pre-tax accounts for people 67 and younger.
Under that threshold, particularly for people over 67, the tax risk is usually minimal. Required minimum distributions on a smaller balance will likely stay in the 12% bracket for the majority of retirement.
Paying 22% today to avoid 12% later is not a strategy. It is paying extra taxes early and calling it planning.
I worked with a 68-year-old woman last year. $180,000 in a traditional IRA. She had been told by a family member, who had heard it somewhere, that she needed to convert before rates went up. We ran her full retirement projection.
Her projected required minimum distributions would never push her above the 12% bracket. Not even close.
Converting at 22% today to avoid 12% later would have cost her money. Net, over the full 20-year projection, she would have paid more in taxes, not less.
We kept her traditional IRA intact. She will pay modest taxes on her distributions for the next two decades and come out ahead.
The threshold I use in my practice: if you are under 67 with more than $200,000 in pre-tax accounts, a strategic conversion plan deserves serious attention. If you are over 67 with $200,000 or less, you likely do not have the tax risk that justifies the cost of conversion today.
Most people in that second category do not need Roth conversions. They need someone to tell them they are actually fine.
The Couple Who Converted Everything
Back to the couple from the beginning.
They are not reckless people. They are smart, careful, retirement-minded people who were handed incomplete advice by sources with incomplete understanding.
The advice had two true pieces in it: tax rates may go up, and Roth accounts have real advantages. Both of those statements are accurate.
What the advice left out: their specific bracket situation, the opportunity cost of paying taxes early, and the three-year conversion plan that would have kept them in the 22% bracket the entire time.
They converted $340,000 in a single year. That pushed them past the 22% bracket and deep into the 32% bracket for a significant portion of that income. They paid 32 cents on the dollar on money that a patient, staged approach would have taxed at 22 cents.
The bracket difference alone on a portion of that conversion was more than $18,000. Add the accelerated tax payments on the rest and the total overpayment landed north of $80,000.
The strategy was right. The execution cost them more than $80,000.
I am going to try not to spill my coffee as I step off this soapbox, but this is exactly why generic advice is dangerous. A three-sentence video clip cannot account for your tax return.
Attention and Details Matter
A well-made pour-over takes about four minutes of deliberate attention. Water temperature matters. Pour rate matters. The grind matters. Rush any one of those three and the cup is off.
Roth conversions work the same way. The strategy is not complicated. The execution is.
Here is the fact to carry out of this conversation: a 2024 study found that fewer than 12% of Americans who qualify for Roth conversions have ever done one intentionally with a plan behind it.
Most either do nothing or do too much at once. Both cost money.
The window where conversions work is real. It is just narrower than the internet suggests.
Next week: the bracket math, the five-year rule, and a specific look at which portfolios benefit most from a staged conversion plan. More coffee required.
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See you in a few days, cheers!
Disclosures:
This blog contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this blog will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Revolutionary Wealth LLC does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
Not associated with or endorsed by the Social Security Administration, Medicare or any other government agency.
Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits.
Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.