Just Get Them Done

(Roth Conversions, That Is)

I’m a fan of Fritz Gilbert’s blog, The Retirement Manifesto. If you haven’t read it, there’s years of backlog awaiting you, so get started. Even as he hands the reins of his blog to another, he stopped in to make one last observation, and it’s a big one:

He hadn’t counted on the power of compounding when he considered the timing of his Roth Conversions. As a result, he’s paying a lot more tax on his conversions, and he’s paying it out of retirement savings (because he’s retired.) And he’s not really making a dent in his future Required Minimum Distributions (RMDs).

The conclusion he’s drawn is maybe he shouldn’t have waited so long to do Roth conversions. This was his biggest retirement surprise.

Before you smack yourselves for not contributing on a Roth basis or not doing conversions earlier, let me stop you. As I’m fond of saying, we don’t need to make ourselves wrong; we already have mothers for that. You could not possibly have known what we now know about current tax law and how Roth IRAs are beneficial. When you entered the workforce, the Roth IRA and Roth 401(k) did not exist. It wasn’t until 2010 that financially well-to-do people were eligible to do conversions. And it wasn’t until 2020 that traditional IRAs lost their preferred place as an inheritance tool, leaving only the Roth as a preferred vehicle.

While there’s a large body of research that optimizes Roth conversions in early retirement for your tax bracket, I’m not a fan. In addition to what Fritz found out about the magic of compounding, there are two other reasons:

First, I think that sequence of returns and sequence of inflation risk make it risky to use the five years before and after retirement to pull lump sums from savings to pay tax. See my Salon Article for more on that. What’s more, conversions at Medicare-age are likely to cost you in Medicare Part B premiums (IRMAA surcharges), which are means-tested.

Second, if you only base your conversion decision (or contribution decision) around tax savings in the current year, you will have missed the ability to be flexible with your withdrawal strategy, to mitigate the effects of future tax legislation and means-testing for benefits, and to protect your estate’s beneficiaries from a giant income tax nightmare when they are in their (likely) highest earning years.

If you want me to explain all that, I will. But it’s easier to net it out:

The sooner you do Roth conversions and pay the tax out of available cash flow, the more solid your future financial plan becomes, even if paying the taxes is painful.

I suggest that Madrina Molly members choose a number they are willing to convert and set aside taxes for that amount each year and just get it done. If the market dips (as it did earlier this year), that’s an opportunity to convert more depressed retirement dollars and pay less tax. But if you have a nice runway and a solid, compounding portfolio, take your 1099-R (and your lumps) and pay the tax. You will then be able to claim every retirement dollar thereafter as your own, not to be shared with Uncle Sam.

If my traditional IRA portfolio grows 8% annually, that’s 8% more in taxes I will pay (compounding!) every year. No amount of tax math will make me want to pay tax on the largest amount when I can pay tax on the smallest amount. And no amount of tax math will make me want to pay tax out of my savings versus my income. If I’m using my traditional IRA, an IRA annuity, pensions and Social Security for income in retirement, all of which are at least partially income taxable, I’m going to be in the same tax bracket I am today (or close). Where’s the benefit to waiting?

The 20^th Century wisdom that says, “You’ll be in a lower tax bracket in retirement” is no longer true. That ship has sailed. Your tax bracket will likely be the same or close to the same unless you intend to scale down your lifestyle radically. And you’re not likely to want to do that.

Asset Location and Roth Dollars

Asset location (as opposed to asset allocation, which is the separation of your assets into classes by type) is the separation of your assets into accounts that are best matched to their purpose. For example, income-producing assets work well in near-term time horizon accounts, because they refill the cash buffer. And they work well in traditional IRA accounts because those are taxed as income anyway. Growth assets are particularly well-suited to Roth IRA accounts because they do not produce income, and their time horizon may be long.

In most cases, unless we are finessing our taxable income year over year, we want to spend our Roth dollars last. Why? We want them to grow tax-free the longest because they will always be tax-free, even in distribution. It’s not unusual for Financial Advisors to place the riskiest/highest-growth assets into Roth IRAs or to have the asset allocation of a Roth IRA be 100% stocks, while traditional IRAs are a mix of stocks and fixed-income assets in a more traditional style of diversified portfolio.

People who engage in high-risk, high-reward venture investing try to push their high-multiple assets into self-directed Roth IRAs to ensure any successful exit event is tax-advantaged or tax-free.

In other words, you want your Roth dollars to grow more than any other assets you have. And you can do so by tinkering with the mix of a Roth IRA’s contents and planning to distribute it last so that it grows the most.

What’s more, if your beneficiaries inherit Roth IRA assets, they may have 10 years to empty the account; but at least the entire distribution is tax-free.

What Can You Do Right Now?

If you are a 65-year-old woman, you have an average life expectancy of 87 years. That means 50% of all women will live longer than 87. You have another 22 years, thanatologically speaking, to live. Obviously, nobody knows the future, but the S&P 500 grew 449% from 2003 to 2025 … 22 years. Do you really want to pay tax on 449% more money, potentially?

Even if you have a more balanced portfolio, a 60/40 allocation grew approximately 345% during that same time period.

So, if you are 50, and you have, potentially, 37 more years to live, don’t you want to avoid paying tax on some of the next 37 years’ growth? Of course you do.

If you are not yet retired, put together a plan to do conversions every year of an amount you are willing to pay taxes on from income. Let’s say you are willing to pay $10,000 in additional taxes to convert some traditional IRA dollars to Roth IRA dollars. And let’s say your effective tax rate is 20%. This means you can safely convert $50,000 of IRA money for that amount of tax ($10,000 / 20% = $50,000).

If you do that every year for a few years in a row, it will make a big difference in your financial future. If the market drops significantly, use this as an opportunity to convert even more traditional IRA dollars to Roth, as you will paying tax on a smaller amount.

If you are not yet retired, contribute on a Roth basis to your 401(k) plan. All catch-up contributions are automatically made on a Roth basis. If you have the option, consider taking your employer match on a Roth basis too.

If you are already retired, consider how much tax you might be willing to pay for a conversion and watch for a significant dip in the market. You can decide in real time if this is the opportunity for you. But don’t make yourself wrong if you don’t do any Roth conversions. Your IRA dollars are still growing tax free, and that’s a benefit. You did your job well.

Do not wait until your first few years of retirement to do Roth conversions of your portfolio. Do them today. Even Fritz Gilbert will tell you that compounding came as a surprise. #WeRescueOurselves

Reading: My Biggest Surprise in Retirement - The Retirement Manifesto

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Copyright Madrina Molly, LLC 2025

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC.