The Roth Conversion Window: Why Strategic Planning Matters Now
- Mar 15
- 8 min read
Perspective Matters
KEY TAKEWAYS
• You already pay 28% on average—but can convert at just 22-24%. This gap between your overall tax burden and your marginal conversion rate creates a planning opportunity that may not last. • The math is compelling: Converting $100,000 now versus waiting 5 years (when rates increase by just 3%) saves approximately $23,000 in opportunity cost over 35 years—and scales proportionally for larger conversions. • "Permanent" tax laws change. Despite OBBBA making TCJA rates permanent, political pressure to tax higher earners and persistent deficits suggest today's favorable brackets may not survive the next fiscal crisis. • Both scenarios yield the same Roth balance—but different tax costs. The benefit isn't in higher account growth; it's in paying less tax now ($22,000 vs. $33,450) so those dollars can work for you instead of the IRS. • This is strategic planning, not tax avoidance. If you're ages 40-60 in the 22-24% bracket with substantial pre-tax retirement accounts, converting now locks in today's rates for decades of tax-free growth. |
5 Things to Know About Roth Conversions
You pay tax now to avoid it later—all future growth is tax-free
No income limits (unlike Roth IRA contributions)
Cannot be reversed after the 2017 tax law change
No required minimum distributions during your lifetime
Tax-free inheritance for your heirs
Common Roth Conversion Mistakes to Avoid
Converting so much you jump tax brackets unnecessarily
Using IRA money to pay the conversion tax
Failing to consider state income taxes
Converting during high-income years
Not coordinating with your overall tax and financial plan
If you're a successful professional or business owner, you probably already know you pay a lot in taxes. But did you know there's a smart way to lock in today's tax rates before they potentially increase?
Here's the reality: if you're in the top 5-10% of earners, you're already shouldering a significant tax burden. According to the Tax Policy Center, the top 5% pay an average federal tax rate of 28%, while the bottom 40% pay just 4.7%. This gap has widened from 14 percentage points in the 1980s to 24 points today.
Despite this, political pressure to increase taxes on higher earners persists. Your pre-tax IRA and 401(k) accounts represent money that will be taxed at whatever rates exist when you withdraw—and you have zero control over future tax policy. Unless you act now.
This article will show you how Roth conversions can help you lock in today's favorable tax rates for decades of tax-free growth. This isn't about avoiding taxes—you already pay plenty. It's about smart planning while the opportunity exists.
UNDERSTANDING YOUR TAX BURDEN
The Reality of What You Already Pay
If you're reading this, you likely fall into the mass affluent category—successful enough to have substantial retirement savings, but not so wealthy that taxes don't matter. You're probably in the top 5-10% of earners, and you're carrying a heavy tax load.
According to data from the Tax Policy Center at the Urban Institute and Brookings Institution, the top 5% of earners paid an average federal tax rate of 28.3% in the 2010s. This includes income tax, payroll tax, corporate tax (allocated to capital owners), and excise taxes. Meanwhile, the bottom 40% paid an average of just 4.7%.
You're not getting away with anything—you're already paying your share and then some. But here's what matters for retirement planning: even though you already pay high taxes, rates could still rise. Political pressure to "tax the wealthy more" shows no signs of abating, and I believe the next move in tax rates will be up, not down.
The Critical Distinction: Average vs. Marginal Tax Rates
This is the most important concept in Roth conversion planning: there's a huge difference between your average tax rate and your marginal tax rate.
Your average rate is all your federal taxes divided by all your income—your overall tax burden. If you're in the top 5%, this is probably around 28%.
Your marginal rate is the tax rate on your next dollar of income—and this is what matters for Roth conversions. For most mass affluent clients, this is 22% or 24% under current law.
Why the difference? Your average rate includes payroll taxes (which cap at $168,600 for Social Security), corporate taxes allocated to your investments, and excise taxes. A Roth conversion is taxed only as ordinary income—no payroll tax, no corporate tax component. Just your income tax bracket.
This gap between your 28% average burden and your 22-24% marginal rate creates a planning opportunity—and it may not last.
THE TAX LAW LANDSCAPE: WHERE WE ARE AND WHERE WE'RE HEADED
The TCJA and OBBBA
The Tax Cuts and Jobs Act of 2017 significantly lowered tax brackets. What was scheduled to sunset (expire) in 2025 was made permanent by the One Big Beautiful Bill Act of 2025. If you're a married couple earning $100,000-$400,000, you're likely in the 22% or 24% marginal bracket today.
"Permanent" sounds secure. But is it?
The Historical and Economic Context
According to the Office of Management and Budget's Historical Tables, individual income tax revenue is actually quite strong—currently at 8.4% of GDP compared to a historical average of 7.9% since 1950. The revenue problem isn't with individual taxes. It's with corporate taxes, which have collapsed from 4.6% of GDP in the 1950s to just 1.8% today.
This means the tax burden has shifted heavily toward individuals. While corporate tax revenue has fallen dramatically, you—the individual taxpayer—are carrying more of the load.
Despite strong individual tax revenue, federal deficits persist. The political debate centers on "taxing the wealthy," and the Tax Policy Center data shows that the top 5% already received a modest 2.3 percentage point reduction in average rates from the TCJA. If political winds shift, that reduction could be reversed.
Why "Permanent" May Not Last
History teaches us that "permanent" tax laws get changed when fiscal pressures mount. Consider:
1990: Budget agreement raised top rates despite "read my lips" promises
1993: Clinton raised rates on high earners to address deficits
2013: Fiscal cliff deal increased rates on top earners
The pattern is clear: when deficits grow and political pressure builds, tax rates on higher earners tend to rise. Even if you believe the wealthy should pay more in taxes, that's exactly why you should convert now—to lock in today's rates before they change.
HOW ROTH CONVERSIONS WORK
The Basics in Plain English
A Roth conversion is straightforward: you move money from your Traditional IRA or 401(k) to a Roth IRA. You pay income tax now on the converted amount. In exchange, all future growth is tax-free forever. There are no required minimum distributions during your lifetime, and your heirs inherit the account tax-free.
The Math That Matters
Here's a real example, assuming you earn 6% annually on your investments.
Assume you have $100,000 in a pre-tax IRA, current tax rate is 22%, and rates increase to 25% in 5 years:
Convert now at 22%:
Tax bill today: $22,000
$100,000 grows tax-free for 35 years: $768,600
Opportunity cost: $22,000 could have grown to $169,100
Wait 5 years, convert at 25%:
IRA grows to $133,800
Tax bill at 25%: $33,450
$133,800 grows tax-free for 30 years: $768,600
Opportunity cost: $33,450 could have grown to $192,150
The key insight: both scenarios yield the same $768,600 Roth account balance. The pre-tax growth for 5 years exactly offsets the 5 fewer years of tax-free Roth growth.
The real benefit is in the opportunity cost of the tax payment. By converting now, you pay $11,450 less in taxes. More importantly, if you wait, that larger tax payment ($33,450 vs. $22,000) could have been growing—costing you an additional $23,000 in foregone investment growth over the full time horizon.
This is why acting now matters: every dollar saved in taxes today is a dollar that can keep working for you.
THE STRATEGIC APPROACH
Don't Convert Everything at Once
Converting too much in one year defeats the purpose by pushing you into higher tax brackets. The smarter strategy is partial conversions over multiple years. For example, convert $50,000-$75,000 annually rather than $300,000 all at once. Think of it as "filling up" your current tax bracket each year without jumping to the next one.
Important Considerations
State taxes count too—factor them into your calculations
Pay tax from outside the IRA—using IRA dollars to pay the tax bill is wasteful
Conversions cannot be reversed—the "recharacterization" rule ended in 2018
Coordinate with other income—consider bonuses, capital gains, etc.
Who Benefits Most
Roth conversions work best for:
Ages 40-60 with long time horizons for tax-free growth
Currently in 22-24% tax brackets (Taxable Income between $100k and $403k for married filing jointly, $50k - $201k for single)
Substantial pre-tax retirement account balances
Ability to pay conversion tax from non-retirement savings
Expectation of stable or higher income in retirement
THE BOTTOM LINE
You already carry a significant tax burden—averaging 28% across all federal taxes if you're in the top 5%. But you can convert IRA dollars at marginal rates of just 22% or 24% under current law. This favorable gap exists because of how our tax system works, but political and fiscal pressures suggest it may not last indefinitely.
Converting now locks in today's rates for decades of tax-free growth. For people ages 40-60 in moderate to upper-middle income brackets, this may be a once-in-a-lifetime planning opportunity.
This isn't about avoiding taxes—you already pay plenty. It's about smart planning to ensure you don't pay even more in retirement. And you don't have to figure it out alone.
When Professional Guidance Matters
IRA rules are extremely complex, and mistakes can be costly and irreversible. A Certified Financial Planner® who specializes in retirement account planning can help you calculate optimal conversion amounts, model scenarios specific to your situation, and integrate conversions with your overall retirement plan.
As a member of Ed Slott's Master Elite IRA Advisor Group, I specialize in helping clients navigate these complex rules. At Prism Planning and Solutions Group, our mission is to ensure you feel well-cared for, informed, and secure about these important decisions. I can help you understand your specific situation, avoid costly mistakes, and create a Roth conversion strategy that aligns with your overall financial goals.
Ready to Get Started?
Schedule an Introductory Meeting here to discuss your financial situation and get clarity on your Roth conversion options. There's no obligation—just an opportunity to get answers to your questions and see if working together makes sense for you.
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Sources and Citations
Tax Policy Center Data:
Tax Policy Center, Urban Institute and Brookings Institution, "Average Federal Tax Rates for All Households by Income Quintile, 1979-2020." Available at: https://www.taxpolicycenter.org/model-estimates/distribution-household-income-and-federal-taxes
Office of Management and Budget Data:
Office of Management and Budget, Historical Table 2.3, "Receipts by Source as Percentages of GDP: 1934-2024." Available at: https://www.whitehouse.gov/omb/historical-tables/
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