Don't Believe This Roth Conversion Myth
Many retirees believe Roth conversions only make sense if you have a taxable account or other savings to pay the taxes.
Believing this myth can cost you hundreds of thousands in lifetime taxes and leave you with bigger RMDs than necessary.
This article is for people over 59½ who have most of their retirement savings in traditional IRAs or 401(k)s.
So, if you’re worried about future tax rates, required minimum distributions, or spending your nest egg faster than you should, pay close attention.
You don’t need a taxable account for conversions to work. You need a strategy that matches your situation.
Below, you’ll see why paying taxes from your IRA is still acceptable, how Social Security changes the math, and when Roth conversions make the most sense (even if every dollar you own is in a tax-deferred account).
How do Roth conversions work?
In retirement, your money lives in three main tax buckets:
Tax-deferred accounts: Traditional IRA, 401(k). You don’t pay taxes while the money grows. Taxes are due when you withdraw.
Roth accounts: You pay taxes upfront. Withdrawals are tax-free.
Taxable accounts: Savings or brokerage accounts outside retirement plans. Contributions are after-tax, and growth is taxed through dividends, interest, and capital gains.
A Roth conversion happens when you move money from a tax-deferred account into a Roth account.
You pay taxes on the converted amount in the year of the conversion.
The benefit is that future growth and withdrawals in the Roth are tax-free.
Example:
Suppose you convert $50,000 from your IRA and owe $10,000 in taxes.
If you pay the tax from the IRA, only $40,000 moves into the Roth. That $40,000 now grows tax-free.
Over 20 years, if it grows at 6%, it becomes about $128,000.
If you left the same $50,000 in your IRA, the future value might be $160,000, but every withdrawal is taxed.
At a 22% rate, you keep about $125,000.
The Roth still leaves you with more flexibility, no RMDs, and less future tax risk.
Why paying taxes from your IRA works, too
A common objection is that paying taxes from the IRA reduces the amount you convert.
For example:
You convert $80,000 from your IRA.
You owe $20,000 in taxes, leaving $60,000 in the Roth.
Compare that to a normal retirement withdrawal:
You need $60,000 to live on.
You withdraw $80,000. $20,000 goes to taxes, $60,000 to you.
The result is essentially the same.
If withdrawals are acceptable, paying taxes from your conversion should be acceptable too.
Why taxable accounts are preferred
Using a taxable account to pay taxes offers two advantages:
More conversion room: You don’t reduce the amount going into the Roth.
Manage assets: Taxable accounts grow slower due to ongoing taxes, so using them first can improve your portfolio’s efficiency.
Example:
Convert $100,000 at a 22% tax rate.
Pay taxes from IRA: $78,000 goes into Roth.
Pay taxes from taxable account: Full $100,000 goes into Roth.
Over time, this difference compounds, making a bigger impact on retirement savings.
Case study with no taxable accounts
A married couple has $1.5 million in IRAs and no taxable savings.
Without Roth conversions, RMDs later in retirement push them into higher tax brackets, especially once Social Security becomes partially taxable, creating spikes in their effective marginal rate.
Their Roth conversion strategy:
Bracket Targeting: They convert enough each year to fill the 22% federal tax bracket without spilling into higher brackets.
Tax Payment Method: Since they have no taxable account, taxes are withheld directly from the IRA at the time of conversion.
Timing: Conversions start before RMDs begin and continue until RMDs are underway, smoothing taxable income across years.
Long-term Benefit: This approach reduces future RMDs, avoids surges into a 27.75% effective marginal rate (caused by the interaction of IRA withdrawals and Social Security taxation), and increases after-tax retirement wealth.
Outcome: Over time, their Roth account grows tax-free, providing flexibility in withdrawals and shielding money from higher tax brackets later in retirement.
Why start Roth conversions before retirement?
Roth conversions are about comparing today’s tax rate with tomorrow’s.
For example, pay 22% now to avoid 25% or higher later.
Social Security taxation and RMDs can push retirees into higher brackets than expected.
Converting earlier reduces long-term tax exposure, even if you pay taxes from your IRA.
Bottom line
The “no taxable account, no Roth conversion” idea is a myth.
Taxable accounts help, but they are not required.
What matters is your future tax rate compared to today’s.
If future rates will be higher, converting now (even paying taxes from your IRA) makes financial sense.