12 Reasons to Consider More Roth

By Dr. Jim Dahle, WCI Founder

Roth conversions and contributions may be the most challenging topic in personal finance and investing. Deciding whether, when, and how much to convert or contribute is difficult because it relies on so many factors, some of which are unknown (and unknowable) to those making the decisions. The frequency of how often this decision is faced doesn't help. I mean, you can make Roth contributions just about every month throughout your accumulation phase, and Roth conversions are an annual decision in both the accumulation and the decumulation phase. It's unlikely you're going to get it right every time, so give yourself some grace for past bad decisions. You're choosing between good and better most of the time anyway.

Even the best rule of thumb I can come up with (tax-deferred contributions and no conversions during peak earnings years) has so many exceptions that it is almost useless. In today's post, we're going to discuss a dozen factors you may not have considered, all of which would cause you to lean more toward making Roth IRA contributions or doing a Roth conversion. The two decisions are surprisingly similar and, in practice, they can be effectively lumped together. If making a Roth contribution is correct, you probably ought to be considering Roth conversions, too. None of these factors changes the primary factor, which is a comparison of your tax bracket at the time of contribution (or conversion) and the future tax bracket of the person or entity withdrawing it from the account later.

But they do add complexity and nuance to the decision.

#1 Higher Widow/Widower Tax Brackets

While a generalization, women tend to marry older men, and men tend to die younger than women. That often results in a lengthy period of life as a widow that could easily be a decade or longer. Widowers, while more rare, have the same issue, of course. When one spouse dies, income and expenses decrease, but they usually aren't halved. Your tax bracket, however, likely will be. Thus, you not only lose the companionship of your spouse, but your tax bill goes up, too. The more likely a lengthy widow/widower period is in your relationship, the more you should lean toward doing Roth contributions and conversions.

More information here:

Should You Make Roth or Traditional 401(k) Contributions?

#2 No Need or Desire to Spend RMDs

People complain about Required Minimum Distributions (RMDs) all the time. They probably shouldn't. All an RMD says is that you've maximized the benefit of this tax-protected account and that it's time to reinvest the dollars in a taxable account, assuming you don't want to spend it (which you probably should if you can find something to spend it on that will make someone's life happier). But if you just plan to reinvest RMDs in taxable, you probably should have done more Roth conversions/contributions earlier in life. Roth accounts don't have RMDs, so that money can grow for a few more years or even decades in a tax- and asset-protected way.

#3 Falling Basis Percentage

While taxable accounts are sometimes drained completely before much is taken out of tax-deferred and Roth retirement accounts, plenty of people opt to keep all three types of accounts well into retirement. The larger your taxable account, the more you should lean toward Roth contributions and conversions, all else being equal. Not only does the taxable account provide a source of funds to pay for the conversion, but it also means you are less likely to actually want to spend your RMDs (see #2).

However, there is another issue here. That issue is that, when selling shares in a taxable account, you generally want to sell the ones with the highest basis (what you paid for the shares). The higher the basis, the more spendable money you have after paying the tax on the sale. For example, if you have $100,000 in shares that you paid $90,000 for and you are in the 15% Long Term Capital Gains (LTCG) bracket, your tax bill on that $100,000 in spending is only $1,500. The longer your retirement goes, the lower your basis is going to be on the shares you need to sell. Eventually, you might be selling $100,000 in shares that you only paid $10,000 for. Now you're going to owe $13,500 in taxes on that $100,000 in spendable money. This favors using that money earlier to do Roth conversions.

#4 Falling Depreciation Sheltered Income

Taxable equity real estate investors often benefit from depreciation sheltering their income from the investment from taxation. However, the longer you own the property, the less sheltered that income becomes. Eventually, it may all be fully taxable at ordinary income tax rates, and you may wish you had more in Roth accounts and less in tax-deferred accounts.

#5 Social Security Taxation

Hopefully, this example won't apply to too many WCIers, but if you have very low taxable income in retirement, you may find that a substantial portion of your Social Security income is not taxable at all. Under current law, 15% of that income is always tax-free, but below an income (AGI plus non-taxable interest plus half of Social Security) of $34,000 ($44,000 MFJ), even more may be tax-free.

More information here:

Roth vs. Tax-Deferred: The Critical Concept of Filling the Tax Brackets

#6 Higher ACA Premium Tax Credit

Early retirees often purchase health insurance from the Affordable Care Act marketplace in their state. The lower your income, the higher the credit to help you pay for that policy. The rules on this seem to be constantly changing, but in general, an income of between 100%-400% of the federal poverty guideline for your family size will qualify for a credit. For a family of two in my state in 2025, that guideline is $21,150, and 400% of that is $84,600. Spending Roth money instead of tax-deferred money might help someone qualify for more of that credit.

#7 Lower IRMAA Surcharge

At age 65, people stop playing the ACA game and start playing the IRMAA game. IRMAA stands for Income-Related Monthly Adjustment Amount, and it is a surcharge for Medicare for the well-to-do. The higher your Modified Adjusted Gross Income (MAGI), the higher your surcharge. Having more Roth and less tax-deferred money to spend lowers the surcharge for many retirees in any given year. It essentially functions as a stealth tax. While only 8% of Americans pay IRMAA, most WCIers will. Maximum IRMAA is over $500 a month. Each. So, it could total over $12,000 per year. More Roth and less tax-deferred helps reduce that surcharge.

#8 Fewer Dividends to Be Taxed

If you use your taxable account to pay for Roth conversions, you won't get nearly as much in taxable dividends in retirement. While those are often taxed at a lower qualified dividend rate, they are taxed. More Roth equals less tax.

#9 Kids Do Better Than Parents

While not always true, especially among the high-income folks who tend to read this site, the next generation historically does better economically than the prior one. So, when they receive a little tax-deferred inheritance from their parents, it is often heavily taxed. Having managed my parents' portfolio and having helped them with their estate planning, I know that most of my inheritance will be tax-deferred. And it's all going to be taxed at 37%, a tax rate they never paid in their life. More Roth conversions and contributions sure would have helped me out. Maybe do your kids a favor and pay the tax at your lower rate.

More information here:

Why Wealthy Charitable People Should Not Do Roth Conversions

Supersavers and the Roth vs. Traditional 401(k) Dilemma

#10 Kids Inherit Money at Peak Earnings Years

In general, your peak earnings years tend to be in your 50s. That also happens to be when parents are most likely to die. If your parent is 30 years older than you and dies as expected in their mid-80s, you'll be in your mid-50s, smack dab in the middle of peak income. And that tax-deferred inheritance is going to be taxed as high or higher than anything else you ever earn. That argues for more Roth.

#11 Your Kids (and Their Tax Preparer) May Not Know About Income in Respect to Decedent

Doing Roth conversions lowers the amount of estate tax paid because it shrinks the estate. However, there is a tax deduction that makes up for that extra estate tax referred to as Income in Respect of a Decedent (IRD). It's basically a tax deduction your heirs can claim for the extra estate tax paid due to failure to do a Roth conversion. However, they have to know about it. And since you just learned about it in this paragraph, what are the odds that they're going to know about it? Maybe not so good. It's a good reason to do more Roth.

#12 Behavioral Push to Save More

We often make these decisions and calculations as though we are the mythical homo economicus—that perfectly unemotional, logical, and theoretical person that does not exist. In reality, investment behavior matters more than investment logic. People tend to put the same amount of money into their retirement accounts, whether it is Roth or tax-deferred. Thus, if they save in Roth, they save more, at least in after-tax terms.

Even our retirement accounts are set up this way. Someone under 50 can put $23,500 as an employee contribution into a tax-deferred 401(k) [2025 — visit our annual numbers page to get the most up-to-date figures]. Or $23,500 into a Roth 401(k). Those numbers might look the same, but they aren't on an after-tax basis. For someone with a 45% marginal tax rate (federal plus state), $23,500 into a Roth 401(k) is the equivalent of $42,727 into a tax-deferred 401(k). Not the same thing. If you, like most of us, are not homo economicus, you might lean a little more toward Roth. Even if you don't, be sure to put additional money into a taxable account to make up for that lower contribution.

The Story of The Heckler

I was speaking at a meeting for the Society of Thoracic Surgeons and actually had a heckler for the first time I can remember at a talk like that. It was a financial advisor who had sat through my talk for some bizarre reason. She felt I was giving bad advice because I shared the general rule of thumb to use tax-deferred accounts during peak earnings years. Her argument was essentially that everyone should do Roth all the time. Well, “always” and “never” are dangerous words, and her argument was obviously ridiculous.

As Einstein said, “Everything should be made as simple as possible, but not simpler.” The Roth vs. tax-deferred (or the Roth conversion) decision is going to remain pretty darn complicated. Do the best you can and don't beat yourself up if you don't get it right every time. But do take these 12 factors into consideration.

What do you think? What are the most important factors to you when it comes to Roth contributions and conversions? Are you doing either this year? Why or why not? 

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