The core trade-off
Traditional accounts deduct now and tax later; Roth accounts tax now and are free later. The decision hinges on the expected marginal rate at contribution versus at withdrawal — not on which account "grows more," since identical returns and identical rates produce identical results.
Roth conversions
Converting traditional dollars to Roth triggers current ordinary income on the taxable portion, in exchange for tax-free growth and no lifetime RMDs. Conversions are most attractive when:
- The taxpayer is in a temporarily low bracket (a gap year, early retirement before Social Security and RMDs begin)
- There are expiring deductions, credits, or NOLs to absorb the income
- Account values are depressed, so more shares convert per dollar of tax
- Taxes can be paid from outside funds, preserving the full converted balance
IMPORTANT — the pro-rata rule: If a taxpayer holds both deductible and nondeductible amounts across all traditional IRAs, a conversion (or any distribution) is taxed proportionally based on the ratio of after-tax basis to total IRA value. You cannot cherry-pick and convert "just the nondeductible" contributions.
Required minimum distributions
- RMDs apply to traditional IRAs and most employer plans once the applicable beginning age is reached; Roth IRAs have no lifetime RMDs for the owner
- Failing to take an RMD triggers a substantial excise tax on the shortfall (reduced if timely corrected)
- Under current rules, most non-spouse inherited retirement accounts must generally be emptied within 10 years — the old lifetime "stretch" is gone for most beneficiaries
Withdrawal sequencing
A common default is taxable accounts first, then tax-deferred, then Roth last — but the better answer is often to fill up low brackets deliberately with tax-deferred withdrawals or conversions before RMDs and Social Security push the taxpayer into higher brackets later.
EXAM TIP: Watch for cliff effects. Additional income can increase the taxable portion of Social Security benefits and trigger higher Medicare premium surcharges — meaning the effective marginal rate on a conversion can exceed the stated bracket.