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Would you send the government a big check this year — in return for a potentially far larger future tax break?

That’s the simple and essential premise of Roth conversions — paying taxes now on regular IRAs, 401(k)s and other tax-deferred retirement accounts (except those from your current job) in exchange for tax-free withdrawals of those balances, plus all their growth, down the road.

Many Americans have spent the last 40 years growing tax-deductible retirement savings inside traditional 401(k), 403(b) and IRA accounts. But when you withdraw those funds, the money is taxed as ordinary income at your then-current rates — on top of any other taxable income you may be receiving, such as a pension or even your Social Security benefit.

If you have a traditional pre-tax retirement account such as an IRA, 401(k) or 403(b) account, the government mandates you take required minimum distributions (RMDs) at age 73 — even if you don’t need the withdrawals to live on. (The RMD age will rise to 75 in 2033.) The government wants to get its share of your tax-deferred savings windfall by forcing these taxable withdrawals. Doing a Roth conversion now avoids RMDs later.

So basically, the big math question is whether you are better off paying those taxes now, out of current savings (and preferably not out of your retirement account assets, so they can keep growing) or whether you should leave things alone and take your chances on taxes in the future.

Further, you must decide whether to convert all or just part of your IRA to a Roth. And then decide whether you should do it all in one year or spread it out over time. Note: if you’re still working, you can’t convert your current 401(k).

Figuring out whether to do a conversion and precisely how much to convert in each future year is immensely complicated. Here are some of the interconnected decision factors and tradeoffs.

—Tax brackets. Paying more federal and, potentially, state taxes today will lower these taxes in all future years. That’s a multiplier-type effect, even though we can’t predict future tax brackets.

—Need for liquidity. If you use your liquid savings outside your IRA to pay the income taxes, will you be in a tight position if you need cash for an emergency? (Taking extra money out of the IRA to pay taxes partially defeats the purpose.)

—IRMAA. Because all of the conversion is considered taxable income in the year of conversion, it can raise your Medicare Part B and Part D premiums in the short term. Over the long term, these premiums will be far lower because Roth withdrawals don’t impact IRMAA taxation.

—Taxation of Social Security benefit. If you are receiving a Social Security benefit, and you add your conversion amount to your adjusted gross income, it could make up to 85% of your benefit taxable in the year of the conversion. But future Roth withdrawals won’t impact your benefit taxation.

—Market timing. The last thing you want to do is convert at the top of the market, when your account is most highly valued. Think of how you would feel if you paid taxes on the peak value at conversion, only for the market to decline in the next year. Of course, no one has a crystal ball about when the market has peaked!

—Your longevity. It’s difficult to gauge how long your assets might have to grow on this tax-free basis after conversion. And after your death, your beneficiary will face slightly different withdrawal rules, depending on whether the beneficiary is a spouse, and how the inherited IRA is handled.

Clearly, this is a multi-dimensional computation, and not a matter of guesswork. Further, you want to get advice from someone who is not benefiting from fees on assets under management.

These complex tradeoffs are a feature of the new Roth Conversion Optimizer that is one part of Maxifi Planner (Maxifi.com) — a comprehensive economics-based lifetime financial planning tool created by Boston University economist Larry Kotlikoff, who also created MaximizeMySocialSecurity.com. (Note: Kotlikoff is my co-author and economic genius behind our book "Social Security Horror Stories.")

Maxifi’s patented interactive algorithms are designed to answer any and all of your planning and retirement questions, including analyzing whether you should do a Roth conversion. It will calculate precisely how much to convert annually to minimize your lifetime taxes and thus maximize your household’s sustainable living standard.

You won’t know the impact on increasing your lifetime spending until you run the Maxifi premium program. Check out the demo and podcasts at Maxifi.com. At $149, including free online support, it’s well worth the cost.

And that’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2025 Terry Savage. Distributed by Tribune Content Agency, LLC.