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The Road To Roth Conversion: Opportunity Cost Myth Thumbnail

The Road To Roth Conversion: Opportunity Cost Myth

Written by: Ken Burke, CPA/PFS CBEC®

Roth conversions are a popular planning strategy for those in the know. We’ll break down the strategy and reasons for using it along with the most common objection we hear. Let’s start with some of the basic concepts.

What is a Roth IRA?

  • Contributions to a Roth IRA are not deductible.
  • Contributions and earnings on your Roth IRA are not subject to tax once you meet two criteria:
    1. Your Roth has been open for at least 5 years measured from the first contribution year, and
    2. You are over 59½ when you take a distribution
  • Contribution limits are the same as a traditional IRA:
    1. Under 50: $6,000
    2. Over 50: $7,000
    3. The limits are usually increased every year for cost-of-living adjustments.
  • A traditional IRA is forever taxed, even after you die.  A Roth IRA is never taxed.

What is a Roth Conversion?

It’s like Saul’s conversion to Paul on the road to Damascus. Saul, a persecutor of early Christians, had a conversion experience, changed his name to Paul and became an historic recruiter for the early church. You might be wondering what Saul’s conversion has to do with Roth conversions. Everything!

Saul was a tax collector. He would collect taxes from his community for Romans. He went from collecting taxes to establishing one of the longest standing 501(c)(3) tax-exempt entities, the Christian Church. Saul, now Paul, became a brilliant tax strategist. Like Paul, we too are tax strategists, and we can help you get Saul out of your traditional IRA and convert it to a tax-exempt account, a Roth IRA.

A conversion is simply moving funds from your traditional IRA to your Roth IRA. There are no limits on the amount you can convert. However, there is one catch: you need to pay tax on the conversion amount. A traditional IRA is forever taxed, so the tax needs to be paid sooner or later. By converting to a Roth IRA, you are deciding to pay the tax today. 

A Common Myth

It’s reasonable to believe that by paying taxes today you will lose out on the growth of the tax dollars. After all, you are handing cash over to Saul today and can no longer invest it. We refer to this as the opportunity cost argument. The argument appears sound on the surface, but it is a myth. It is a common reason given for not going through the conversion process. There is some pain, as paying taxes is not enjoyable and finding reasons to avoid pain is easy, but if Saul didn’t go through his painful conversion process, we would be paying taxes to the Romans!

To illustrate:


  1. Investment returns are 100% over 20 years
  2. Tax rates remain the same at 30%

No Roth Conversion Roth Conversion
Initial Balance $100,000 $100,00
Income Tax on Conversion—30%
Net Amount to Invest $100,000 $70,000
Value in 20 Years—100% Return $200,000 $140,000
Income Tax on Distribution—30% -$60,000 $0
Net After-Tax Amount $140,000 $140,000

As you can see, there is no opportunity cost when tax rates remain the same. You might be wondering about the results when tax rates rise in the future. In that case, the Roth results in more after-tax money. The inverse is true if tax rates go down in the future; the Roth results in less after-tax money.

The Key Question

Will the Bills win the Super Bowl? No, that’s not it.

Will taxes be higher or lower in the future? No one can answer this question other than your over-served relative at the family holiday party. Don’t take tax advice from Cousin Earl.

Let’s give some perspective:

  1. We have $31 trillion in national debt.
  2. An annual spending deficit of $1 trillion.
  3. The Trump tax cuts expire in 2025, increasing tax rates about 3%.
  4. Tax rates are historically low, 37%. In 1944, the highest marginal tax rate was 94% on income over $200,000, about $2,000,000 today.
  5. If you are married, at some point one of you will be single, potentially doubling your tax rate.
  6. There have been unprecedented levels of monetary and fiscal stimulus injected into the economy. We printed a lot of money.
  7. The bill is coming due.
  8. When Congress gets hungry for taxes, your IRA is on the menu!

In my opinion, taxes are going up. Any politician that says we need a tax cut can’t do basic math. I’ve been a Tax CPA for over 35 years and believe we may be in the lowest tax environment we will ever see. Understanding this, I’m converting my traditional IRA to a Roth IRA. I’m also splitting my 401(k) contributions between traditional and Roth accounts.

We’ve tried to simplify the analysis to illustrate a few key points. If you are considering a Roth conversion, work with a qualified tax and financial professional. Mistakes are costly when dealing with your IRA, so consult an expert. At High Falls Advisors, we have CPAs, Attorneys, Enrolled Agents and CERTIFIED FINANCIAL PLANNER™ PROFESSIONALS (CFP®)  who are ready to help guide you through the complex rules, avoid the traps and turn your IRA into a “501(c)(3)”, a Roth IRA.