Roth Conversions Aren’t Free. Someone Has to Pay the Tax Bill.

The Tax Bill Shows Up the Same Year, in Cash

Gordon is 62, single, and has $1.4 million sitting in traditional accounts from a career of 401k contributions. He plans to retire at 65 in New Jersey. Run his plan forward with a Roth conversion strategy targeting the 22 percent bracket, and one sample year at 65 looks like this.

His living expenses and healthcare premiums come to $65,000 that year, covered by a $65,000 withdrawal from his traditional IRA. Separately, $53,000 moves from that same IRA into a Roth IRA. That move is not spending. The money stays his. It just moves to a different account, taxed differently later.

The conversion creates a $13,000 tax bill at his marginal rate. Add the tax on his other income and the total for the year is $20,000. He has to pay it the same year the conversion happens, and $13,000 of it has to come from cash he holds outside the IRA.

Do Not Pay It From the Account You Are Converting

The mistake shows up when someone runs low on outside cash and pulls the tax payment straight out of the traditional IRA instead. It feels convenient. It defeats the strategy.

Every dollar pulled that way is its own taxable withdrawal. It adds tax on top of the tax it was supposed to cover. Less money reaches the Roth side than planned. The traditional balance shrinks by less than planned too, which leaves a bigger required minimum distribution waiting years later, the exact outcome the conversion was meant to reduce.

Gordon’s plan needs about $17,000 a year in outside cash to keep converting at this pace, $171,000 total over ten years, before his required withdrawals begin. That is a real number to plan for, not an afterthought to cover once the tax bill arrives.

Is It Worth It?

This is where the lifespan question comes in. Converting means paying real cash for ten years, on a schedule you chose. Doing nothing means paying a bigger bill later, compressed into whatever years you live past 75, on a schedule the IRS chose.

For Gordon, doing nothing costs $720,000 in lifetime federal and state tax during retirement. Converting at this pace brings that down to $673,000. The $171,000 he spends on conversion tax along the way is already inside that $673,000 number, and he still comes out $47,000 ahead. His forced withdrawal at 75 also drops from $95,000 a year to $59,000, which matters for Medicare premiums as much as for the tax bracket.

That $47,000 answer holds if Gordon lives long enough to reach those RMD years. Someone with a shorter life expectancy is trading ten years of certain, voluntary tax payments for RMD years he might not live to see. Run your own numbers against your own health and family history, not someone else’s average, before deciding how hard to convert.

If You Do Not Pay It, Your Kids Will

Whatever is left in a traditional account when Gordon dies does not become tax free just because he never got around to converting it. Under the SECURE Act, a non-spouse heir has to drain an inherited traditional IRA within 10 years. The IRS taxes every dollar as their ordinary income, at their rate, not his.

With his current conversion strategy running through age 95, Gordon’s traditional balance reaches zero and $5.1 million sits in Roth, which passes to his heirs tax free. Skip the conversion plan and $1.7 million stays traditional, taxable to whoever inherits it, on a ten year clock they did not choose.

One Question, Not Three

People usually treat bracket math, cash flow, and legacy planning as three separate topics. For a traditional account, they are the same question asked three ways. The IRS taxes that money no matter what happens. Converting is choosing to pay it yourself, on your schedule, at a rate you picked, using cash you set aside for exactly this. Not converting hands the same bill to future you, at 75, or to your kids, on a ten year clock. Either way, it is usually a worse rate than you would have chosen yourself.