Should I convert some or all of my taxable IRA money to a Roth IRA?

While this has been a very common question for many years it seems to be making a strong return in 2020 due to Covid19. The possibility of lower taxable income for some people who have been laid off or who’s businesses might experience a steep decline in income has generated a renewed interest in this topic. I’ve even seen well-known celebrity financial guru’s make blanket suggestions that this may be the year for anyone & everyone to consider this strategy due to the income tax aspects of Roth IRAs.

Without making this an in-depth educational discussion on Roth IRAs, let me just highlight the primary reason folks might want to fund or rollover taxable IRA monies into a Roth IRA. The primary reason is that earnings generated within a Roth IRA are tax-free even when withdrawn in your retirement years. Many refer to them as a “tax-free” account which is loosely accurate.

The basic premise that Roth IRA contributions or rollovers make the most sense when you’re in the lowest income tax brackets continues to hold true. Unfortunately, some who are suggesting that 2020 might be a great year to contribute or rollover into a Roth IRA. They are making that suggestion with the notion that if income tax rates rise in the future, you’re better off paying taxes on your Roth contributions or rollovers in 2020 which will likely be one of your lowest tax rate years. These folks are suggesting that with all the government bailouts and stimulus payments they’re shoveling out that the only way to recoup these disbursements is with higher income tax rates in the future. I’m not going to debate that we may see higher income tax rates and brackets in the future. What I will debate is whether or not it makes sense for “anyone” to take the tax hit this year simply because income tax rates\brackets might be higher in the future. Here are my arguments:

First, even those on unemployment receiving unemployment income will have to report that income on their 2020 individual income tax returns. Simply because someone’s wages may be lower in 2020 due to the lack of unemployment, the additional unemployment income combined with the additional federal payment of $600 per week through the end of July might actually replace much of those wages. So don’t assume you’ll be in a lower tax bracket in 2020

Second, even if you are in a lower tax bracket in 2020, it may not be one of the lowest tax brackets and this lower bracket might still be MORE than your effective tax rate in the future (I’ll get into this below)

Third, even if you are in one of the lowest tax brackets in 2020 you’re going to hand over the income tax cost of that contribution or rollover to the government today (or possibly over three years under the CARES act) which means you’ll have less money invested

Lastly, as I eluded to above, your 2020 income tax “bracket” may still be higher than your “effective” tax rate in retirement. This means if you decide to contribute or rollover into a Roth IRA now, in one of the highest tax brackets, you just might pay MORE income tax then you would if you were to tax that money in retirement through a traditional taxable IRA account. Before I get into an actual taxpayer example of a tax bracket vs their effective tax rate lets make sure we understand what these two terms mean.

Our federal income tax system is structured as a progressive tax system with income tax “brackets”. The income tax brackets today can range from 0 (zero) to 37% and as your taxable income increases, you’ll pass thru the various tax brackets with the highest being 37%. These are income tax brackets.

When you hear the term “effective tax rate”, this is NOT an income tax bracket, it’s the calculated percentage of income tax you pay on your gross income. For example, someone in the 37% income tax bracket may have an effective tax rate of 25% because a lot of their taxable income passed through the lower tax brackets even before they reached the highest tax bracket of 37%.

Here’s an actual client example of the benefit of someone who took advantage of tax deferral on earned income:

This doctor was almost always in the higher income tax brackets during their earning years. So other than the Reagan years when the highest income tax bracket was 28%, he was always in the 30%+ income tax bracket so any money he deferred from his earnings he deferred 30%+ in federal income taxes. He’s been retired now for several years drawing from his taxable retirement accounts and paying tax on those funds today. For 2020, he pulled $100k from his retirement accounts and his gross income was $140k. He paid $14k in federal income tax in 2020 on the gross income of $140k which is an effective tax rate of 10% even though he was in the 22% income tax bracket. On average I’d bet he shifted earned income from an income tax bracket of 35% during his peak earning years to an effective tax rate of 10% in his retirement years. So on his distribution of $100k, he paid $10k in tax instead of $35k in tax during his earning years for an actual savings of $25k. Not to mention the power of tax-deferred investment returns on those retirement funds.

Had this doctor chosen to NOT to make tax-deductible contributions into his retirement plan during his earning years he would have chosen to pay 35% in income tax on those retirement plan contributions instead of paying 10% on those contributions AND the related investment earnings.

In summary, make sure you completely understand your income tax situation today and where you think you’ll be in your retirement years and do NOT fall for the fear-mongering idea that raising income tax rates/brackets means you will pay more in income tax when you retire. The reality is with our progressive income tax system it’ll be nearly impossible to pay a higher effective income tax rate in retirement compared to your highest income tax brackets of today.


About Tim Lott
Tim Lott, CPA, CVA, has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator of You can reach Tim at or any of the other dental partners/principals at (800)772-1065 or