Should I Do a Roth Conversion? Why Most Don't Pay Off

Everyone says a Roth IRA conversion is a no-brainer. Roccy DeFrancesco disagrees. After years of running the numbers, his view is that about 85% of the time a Roth conversion leaves the IRA owner with less money to spend while they're alive. In this episode he explains why, and when a conversion does make sense. Design for the right goal. Most advisors and CPAs build Roth conversion plans around three things: lowering taxes, cutting required minimum distributions (RMDs) and avoiding the IRMAA Medicare surcharge. Roccy thinks that's the wrong target. The only goal he designs for is more total money for the client. Lower taxes, RMDs and IRMAA are welcome, but not if they leave you poorer. How most Roth conversion numbers get run: by guessing, with a free online calculator, with a homemade spreadsheet, or with industry planning software. Roccy considers all four unreliable. He singles out Schwab's online calculator (fewer than eight inputs, compared with the 40-plus variables in the software his team spent two years building) and says that in his opinion even well-known programs like eMoney and MoneyGuidePro don't run accurate conversion numbers. The number-one reason Roth conversions don't work: lost compounding growth. A conversion doesn't happen in a vacuum. The tax has to be paid from somewhere, usually a brokerage account or the IRA itself, and every dollar used for the tax stops compounding for the rest of your life. Convert $100,000 a year from a $500,000 IRA and pay $20,000 a year in tax, and that's $100,000 gone over 10 years. Pay the tax out of the IRA and it gets worse, because the withdrawal is taxed too. Other mistakes Roccy covers: “Taxes are going up.” He calls this fear-mongering. Top rates have moved like a yo-yo for 70 years, but the effective rate the average taxpayer pays has barely changed, and it's lower still in retirement. Not moving the tax brackets. On his slide, reaching the 22% bracket takes about $101,000 of income in 2026 and about $191,000 by 2050. Software that holds your rate flat every year, he says, produces a flawed result. Assuming spending rises every year. A study of 280,000 retirees shows spending tends to fall with age. Less spending means less benefit from converting. Ignoring IRMAA. Medicare Part B and D premiums are means-tested on modified adjusted gross income, and a conversion can spike it. Not running a full retirement plan. You can't know someone's effective tax rate year by year without all of their income and expenses. The examples (Roccy's illustrations from his software): Couple, both 60: $750,000 IRA, $675,000 brokerage, $155,000 a year in expenses, converting $25,000 a year to age 79 at a 5% net return. The conversion saved about $67,000 in taxes and about $15,000 in IRMAA, yet left them about $62,000 less in total assets at 88. If they die at 85, it's about $206,000 less. At a 7% return they paid $101,000 more in tax and ended about $507,000 less. Add long-term care at $120,000 a year from 82 to 85 and they run out of money at 85. Couple, 60, $1 million IRA: about $85,000 more in taxes and about $209,000 less for themselves, but their heirs come out about $267,000 ahead after the 10-year inherited IRA period. Couple, 72 and 71: mostly cash savings, modest IRAs, $60,000 a year in expenses. Converting $25,000 a year left them about $101,000 ahead, and a 40-year-old child about $336,000 ahead. A rare win on both counts. Affluent couple, 68 and 62: $3 million IRA. Converting cost about $243,000 more in taxes and $1.1 million less in total assets for the couple, while their twin daughters would be about $401,000 ahead after 10 years, but only if they left the money alone. Roccy says a 35% market drop would likely turn the heirs' result negative. Takeaways: the size of your IRA doesn't decide whether converting works. What matters is where the tax money comes from, your age, your spending and your real life expectancy. Roccy warns that advisors who project to age 100 make conversions look better than they are. Conversions look much better when the goal is leaving more to your heirs, and he says that most industry software doesn't model the heirs' side at all. Pitches to watch out for: Roccy closes with three warnings: a bonus annuity to pay the conversion tax (covered in episode 9), cash value life insurance used in what he calls a convoluted way, and oil, gas or solar investments sold for the deduction, which he says turn out worthless 85% to 90% of the time. He also mentions Craig Wear, whom he calls his least favorite person in the industry. Roccy says Wear charges upwards of $12,000 for conversion advice, works only with people who have $1 million or more, and gives advice Roccy believes is inaccurate. Episode 3 covers that in detail. Resources mentioned: Read Deconstructing Roth IRA Conversions: Myth vs. Reality free online, Roccy's book with much more detail. It's also available in print on Amazon. Download the free Top 10 Roth Conversion Mistakes guide, a shorter, lighter version. Have your numbers run. Roccy's team will run your Roth conversion numbers. Contact [email protected] or 269-216-9978. Disclosure: Roccy co-wrote the book mentioned here and earns royalties on print sales. He started the software company whose program runs the numbers in these examples, and his team offers to run conversion numbers for listeners. He also founded an insurance wholesale company that sells fixed products, including annuities. The examples are his illustrations from his software, with assumed returns, tax rates and life expectancies; your results will differ. His comments about Craig Wear, Schwab, eMoney, MoneyGuidePro and other advisors are his own opinions, and none of them has responded here. Nothing here is legal, tax or investment advice. Questions, or a topic you want covered? Reach out.