When a Roth Conversion Doesn't Make Sense: 5 Key Situations to Consider

When a Roth Conversion Doesn't Make Sense: 5 Key Situations to Consider

Jake Skelhorn
May 31, 2024

Roth conversions are a popular topic in retirement planning and personal finance as of late. And rightfully so - they can save you hundreds of thousands in taxes over your lifetime. But, as with most things in personal finance, they are not for everyone. In this post, we'll explore five situations where a Roth conversion may not be the best choice and you might be better off leaving your money in a pre-tax account.

What is a Roth Conversion?

A Roth conversion involves transferring money from a pre-tax retirement account, such as a traditional IRA or 401(k), to a Roth IRA, which is an after-tax account. The primary reason to do a Roth conversion is to pay taxes now if you believe your tax rate will be higher in the future. This is known as tax arbitrage. When you withdraw from a Roth IRA later, it’s tax-free. Other reasons might include reducing the balances in your IRAs to lower your required minimum distributions (RMDs), which we’ll discuss below.

Situations Where Roth Conversions May Not Be Beneficial

1. Expecting a Lower Tax Bracket in the Future

If you expect to be in a lower tax bracket in the future, a Roth conversion may not make sense. For example, if you are currently in a relatively high tax bracket (e.g., 32%) while working, it might be unwise to convert now and pay high taxes, especially if you expect to be in a lower bracket (e.g., 22%) after retirement.

Even retirees who have multiple sources of fixed income, such as pensions, Social Security, and deferred compensation plans can be in a relatively high tax bracket without employment income, reducing the benefit of a Roth conversion.

Key Points:

  • Higher tax bracket now vs. lower tax bracket in retirement.
  • Consider fixed income sources like pensions and Social Security that may keep you in a high tax bracket even after retirement.

2. Lack of Cash to Pay Taxes on the Conversion

When you convert money from a traditional account to a Roth account, the converted amount is considered taxable income. It’s important to pay these taxes from an after-tax account like savings or a taxable brokerage account - rather than withholding from the conversion amount - to maximize the amount that goes into the Roth IRA. If you don't have enough cash to pay these taxes out of pocket, the conversion will not be as advantageous.

For example, if you convert $50,000 from a traditional IRA and are in the 22% tax bracket, you would owe $11,000 in taxes. Ideally, this $11,000 should come from an after-tax account, allowing the full $50,000 to grow tax-free in the Roth IRA. If you withhold taxes from the conversion amount, only $39,000 will be left to grow in the Roth IRA, reducing its effectiveness.

Additionally, if you are under 59½ and withhold taxes from the conversion amount, you will incur a 10% penalty on the amount withheld. This further diminishes the benefits of the conversion.

Key Points:

  • Importance of paying taxes from an after-tax account.
  • Potential penalties if you are under 59½ and withhold taxes from the conversion amount.
  • Strategy for early career professionals: save cash in a taxable account for future Roth conversion taxes.

3. RMDs Are Not an Issue

One common reason for Roth conversions is to reduce future required minimum distributions (RMDs) which apply to pre-tax accounts, but not Roth accounts. If RMDs are not expected to be problematic for you, a Roth conversion might not be necessary. For instance, if your RMDs are unlikely to push you into a higher tax bracket or cause other financial issues, then there’s no problem to solve by converting to Roth.

Let’s consider a retiree planning to live off $80,000 per year. If Social Security covers $50,000 of this, then the other $30,000 needs to come from their portfolio. If this retiree has a $2 million IRA balance at age 73, the RMD would be around $80,000, or $50,000 more than they actually need for living expenses. This extra $50,000 in taxable income can push them into a higher tax bracket, cause social security to be taxable, and create Medicare surcharges (IRMAA).

However, if they only have a $500,000 IRA and the rest in a Roth IRA or taxable accounts, their RMD would only be around $20,000, which isn’t more than they’d need to withdraw anyway for living expenses.

It’s also important to consider the impact on a surviving spouse. After the death of one spouse, the surviving spouse will file as a single taxpayer, which means the same income will result in a higher marginal bracket. The RMDs could have a significant impact on their taxable income and Social Security benefits.

Key Points:

  • RMDs are based on your traditional IRA balance.
  • Consider the impact of RMDs on your tax bracket and Social Security taxation.
  • The impact on the surviving spouse’s tax situation.

4. Health Care Expenses and Income-Based Credits

Converting to a Roth can affect your eligibility for certain health care benefits and credits. For example, it could disqualify you from receiving the premium tax credit under the Affordable Care Act (ACA) if your income exceeds certain limits. Similarly, for Medicare recipients, conversions can impact your modified adjusted gross income (MAGI), potentially leading to higher Medicare Part B & Part D premiums due to income-related monthly adjustment amounts (IRMAA).

For instance, if you are under 65 and relying on the ACA for health insurance, increasing your income through a Roth conversion could cause you to lose valuable premium tax credits. This could increase your health insurance costs substantially.

For those on Medicare, your MAGI determines whether you pay additional premiums. Since Medicare uses a two-year look-back period, converting now could affect your premiums two years later.

Key Points:

  • Impact on premium tax credit for ACA.
  • Effect on Medicare premiums (IRMAA) due to increased MAGI.
  • Medicare's two-year look-back rule for determining premiums.

5. Charitable Inclinations

If you plan to make significant charitable donations, either during your lifetime or through your estate, a Roth conversion might not make sense. After age 70½, you can make qualified charitable distributions (QCDs) directly from your IRA to a charity, which are tax-free. Converting to a Roth first would reduce the amount the charity receives since you'd have to pay taxes on the conversion.

For example, if you intend to donate $100,000 to a charity, doing it through a QCD from your traditional IRA means the charity gets the full $100,000, and you avoid paying taxes on that amount. If you first convert that $100,000 to a Roth, you might only be able to donate $78,000 after paying taxes on the conversion.

Key Points:

  • Qualified Charitable Distributions (QCDs) allow tax-free donations directly from IRAs.
  • 2024 QCD Limit is $105,000 per person
  • Maximizing charitable impact by using traditional IRA funds directly.


Financial planning is an ongoing process. While a Roth conversion may not make sense in your current situation, it doesn’t mean it won’t be beneficial in the future. Regularly reassess your financial plan and stay open to adjustments as circumstances change.