Much is made about the many methods to determine whether or not you should make a Roth IRA conversion. It seems as if this very strategy has been the quintessential tax planning move of the last decade since income limits and restrictions were eliminated in 2010.
In 2025, the One Big Beautiful Bill Act (OBBBA) increased the federal standard tax deduction, which may leave extra room for Roth IRA conversions within certain tax brackets. It also locked in lower federal tax rates for those brackets, which we first saw in the Tax Cuts and Jobs Act of 2017 (TCJA). It’s still difficult to determine whether or not it will eventually be worth it and when it makes sense to do a Roth conversion. After all, a Roth IRA conversion means you’re paying — and locking in — tax today as opposed to an unknown result in the future.
For this reason, I’ve developed a relatively simple and straightforward three-step method for determining if you should make a Roth IRA conversion. In theory, this method will always be valid. However, it’s especially useful now that the TCJA tax rates are permanent. I’ll explain why later.
For now, let’s dig into the three-step method.
Determining “Should I do a Roth Conversion?” in Three Steps
Step 1: Yes or no? Do you have room under the Standard Deduction, 12%, or 24% tax bracket maximums?
Say what you want about taxes going up or being higher in the future. It literally took an act of Congress to stop the tax rate from increasing when the TCJA rates were supposed to expire in 2026. It would take another to increase the OBBBA tax rates, which are permanent (until that happens).
This means that the standard deduction (aka the “0%”), 12%, or 24% tax brackets currently represent the largest differences between tax rates worth exploring for Roth IRA conversion. That’s because the rate brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The 10% or 8% increases between 0% and 10%, 12% and 22%, or 24% and 32% brackets are significant enough, not to mention known, potential increases in future tax rates. That means they’re worthy of consideration for straightforward tax planning purposes. Capping the amounts at these rates will also typically allow for a more “accessible” conversion amount (and resulting tax), consistent with a taxpayer’s circumstances.
In short, contemplate all you want if you can squeeze more juice out of the difference between the top brackets of 35% and 37%. But always remember that it will take a six-figure tax bill today to learn if you were right many years from now.
1. Grab last year’s tax return and look for the line on Form 1040 that has Taxable Income in bold. For the last few years, this has been Line 15. That’s the amount of income that you were taxed on the last time around.
2. Now think about what’s different for this year. Did you get a raise or see a jump in business profit? Will you have more itemized deductions this year? Use this information to make an informed estimate of what that number will be come tax time next year.
3. Check out the tax brackets and standard deduction. Now look for the maximum amount for the standard deduction (aka the “0% bracket”), the 12%, or the 24% rates for your filing status.
- Pro tip: The standard deduction represents what I refer to as the “0% bracket.” There isn’t actually a 0% bracket. But if your income is at or below the standard deduction (or your itemized deductions), your effective tax rate will be 0%.
4. Subtract the result of part 2 from the result of part 3 to arrive at the amount you should consider for conversion. I generally don’t recommend jumping brackets to do your calculations unless you have a strong reason to believe your future taxable income will put you many brackets ahead of today’s taxable income. So, if you’re already in the 10% or 12% bracket, don’t look up to 22% or 24% and consider potentially doubling this year’s tax. Just go up to the top of the next rate (0%, 12%, or 24%).
If you have room, the answer to this step is “yes.” You’re one step closer to determining if a Roth IRA conversion is right for you.
If you don’t have room and you’d need to look another bracket ahead, the answer is “no.” While you can continue the process, your upfront cost will skyrocket.
Step 2: Yes or no? Can you achieve tax-cost efficiency?
Arbitrage: Risk-free profit from taking advantage of price dislocations in different markets. Imagine corn selling for $2 in one market and $3 in another. Assuming you could buy and sell corn in both markets, you’d buy all the $2 corn and sell all the $3 corn you could, on repeat, forever.
When I first developed this method, I wanted to call this “tax-cost arbitrage.” But the reality is that, while it’s close, it’s not quite arbitrage. It’s not truly arbitrage because there is risk involved. Any time you could be wrong, arbitrage doesn’t exist because the wrong end of things represents risk.
In this case, the risk is simply that the assumption on future tax rates turns out to be wrong. Now, with that said, planning with known variables is far easier and almost always more accurate than planning with assumed changes. For tax rates, we know what they are and that they’re permanent unless Congress does something to change them.
Alas, what we don’t know — and can only assume — is what our own tax rate will be at some point in the future. Our own tax rate changes not only because Congress does something but also because our income and deductions change. Plus, other factors — like inflation — determine where our last dollars of taxable income will hit the brackets.
All considered, you achieve tax-cost efficiency with a Roth IRA conversion when the growth in future tax cost savings exceeds your assumed rate of return on your underlying investments. For example, if you assume you will earn 7% on your investment portfolio but your tax cost would grow by 8% in the same period, you can achieve tax-cost efficiency with a Roth IRA conversion.
So we don’t know what your tax cost will be, but we can make some pretty decent assumptions about it using today’s brackets and a reasonable income replacement ratio. Always remember that a Roth IRA conversion hinges on this one thing, that your future tax rate will exceed your current tax rate, more than anything else. My method for evaluating it is simply one way to think through things, but I believe it has a certain logic that makes it appealing.
1. Determine the current tax cost of your Roth IRA conversion. Say you can convert $10,000 at the 24% rate. Your current tax cost will be $2,400.
2. Make reasonable assumptions to grow (or shrink, if that’s your outlook) your conversion amount, assuming you never made the conversion. What do you expect to earn on this money over time?
3. Use an assumed income replacement ratio to figure out what your highest tax bracket will be in the future (or at least when you assume you’ll actually use this money for expenses).
- For example, if you assume that future-you will earn 120% of the income that today-you earns, take 120% of your current taxable income to the tax table and see where it lands.
4. Apply the tax rate determined in part 3 to the future value calculated in part 2 to arrive at your future tax cost. Assume your $10,000 grows at 7.2% for 10 years and is worth $20,000 in the future. If you landed on 32% in part 3, your future tax cost would be $6,400.
5. Calculate the average annual rate of growth of your tax cost. To turn $2,400 into $6,400 in 10 years, the rate of growth must be 10.31%. In this example, yes, tax-cost efficiency has been achieved because 10.31% is more than 7.2%.
A “yes” to this question means that your money is more productively “invested” in tax savings on your portfolio than it would be invested in your portfolio. A “no” means that you are spinning your wheels, and a conversion doesn’t make sense to consider.
Step 3: Yes or no? Are there any other reasons not to convert?
To this point, this exercise has been pretty objective. Sure, there are a few assumptions that you need to make. But on the whole, you determined the result using a binary response of some kind. Here, we’re looking for a “no” answer (four “no”s, actually) to be the final green light … but it’s not that straightforward.
The last step is a combination of objective and subjective criteria in a collection of four questions. Here’s how to evaluate Step 3.
3a) Do you expect your future tax rate to be lower?
You already know the answer to this because you determined it when answering part 2 in Step 2. If, for some reason, you’re still at this point — with a lower future tax rate — you likely have an edge case where your particular set of unicorn assumptions led you to tax efficiency even when paying a higher rate today than you would in the future. This is your reality check. Don’t convert if you think your future top tax rate will be lower than your current top tax rate.
3b) Do you need this money within five years?
Again, this is another previously contemplated variable. If your “year of use” in part 3 of Step 2 was five years or less from now, it turns out that you do need this money within five years, and you should not convert it to a Roth IRA now. Why? Well, if you do convert and you then take a full distribution from the converted Roth IRA within five years, you will need to pay tax — and possibly tax penalties — on the earnings that you withdraw. Need the money this soon? Don’t convert.
3c) Do you not have heirs and a potential long-term care funding need?
If you answered “yes,” that you do not have heirs and you do not have a potential long-term care funding need, then doing a Roth IRA conversion may end up accelerating taxes to no one’s benefit. You probably know pretty well if you have heirs or someone to whom you want to leave your money. But are you sure you’ve made a long-term care plan that will stand the test of time? No matter the plan, there’s always the potential that shoring up your tax-free income sources could make your money last that much longer. If you’re absolutely certain that you have no one to leave your estate to and no need whatsoever to increase your available resources in a long-term care scenario, you probably do not want to convert.
3d) Do you not have the cash (or the stomach) to pay the taxes for the conversion?
The best is saved for last. You’ve made it two-and-three-quarters of the way through the criteria, and this one is the real whopper: paying the tax today with cash from another source. Some will not be comfortable dropping a pretty large five-figure check when given the option. That’s totally understandable, and why this step is here in this exact position. If you’ve made it to this point, you’ve learned through this process that converting is very likely the right move. But it’s not without risk, and if you simply can’t stomach writing this check, don’t. You don’t have to. You may end up paying more tax in the long run, but nothing today. In short, be confident in the action you take, understanding the risks and rewards.
There is one narrow set of circumstances where part 3d of Step 3 can be a “yes” but conversion is still feasible. If you’re over 59.5 years old and you have a long (15-plus year) time horizon for this money, you may want to take one final look at the future value of a conversion where you withhold taxes from the IRA itself. One obvious use case is that you don’t anticipate touching much traditional IRA money prior to being required to take distributions in the year you turn 73 (or 75, for those born in 1960 or later).
If you withhold tax on the conversion amount prior to age 59.5, you will owe a tax penalty on the withholding amount. And if you don’t wait long enough for the converted and withheld amount from your Roth IRA to grow, the entire exercise will have been a boondoggle. You will end up paying more taxes than if you’d just distributed from your traditional IRA later.
Assuming you finish Step 3’s four-question gauntlet with every answer being a “no,” you will have reached the point where you should feel ready to convert your traditional IRA to a Roth IRA (in whatever amount you determine in Step 1). You or your family will pay tax on this money eventually, and this process has just helped you determine that the tax you pay today will very likely be the lowest amount you’ll ever pay.
Happy Roth IRA conversion planning!
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