Most conversations about Roth conversions focus on one question:
How much tax will I pay to convert?
That’s important.
But I think it misses the bigger issue.
If you’re 55 and have another 25 or 30 years ahead of you, the real question is:
Where do you want the next 25 years of growth to occur?
Consider a hypothetical $500,000 investment earning 8% annually.
After 20 years, it would be worth approximately $2.33 million.
Inside a traditional IRA, that growth is tax-deferred—not tax-free. When the money eventually comes out, withdrawals are generally taxable as ordinary income.
Inside a Roth IRA, qualified withdrawals can be completely federal-income-tax-free.
That’s a profound difference.
But there’s another Roth advantage I don’t think gets nearly enough attention.
With a traditional IRA, the government eventually starts telling you when to take your money out.
Under current law, traditional IRA owners generally must begin taking required minimum distributions (RMDs) at the applicable starting age—even if they don’t need the income.
Those withdrawals can create taxable income.
A Roth IRA is different.
The original owner generally has no RMDs during their lifetime.
If you’re fortunate enough that you don’t need the money, you can leave it inside the Roth and continue compounding.
Think about what that means for someone retiring with substantial assets.
You aren’t simply deciding between paying taxes now or later.
You’re potentially moving an asset from an account where:
1) Growth is tax-deferred.
2) Withdrawals are generally taxable.
3) And distributions eventually become mandatory.
Into one where:
1) Growth can be tax-free.
2) Qualified withdrawals can be tax-free.
3) And you aren’t forced to take distributions during your lifetime.
Now add discounted Roth conversions to the equation.
Certain illiquid private investments may receive a lower fair-market valuation from an independent qualified appraiser because of factors such as limited marketability, liquidity and control.
That can potentially allow an investor to convert an investment at a lower taxable valuation—then have future appreciation occur inside the Roth.
There are important rules, risks and tax consequences here, and any valuation discount needs to be independently supported and defensible.
But for someone in their 50s with a seven-figure traditional IRA, I think the strategic question is much larger than:
“How much tax will this conversion cost me?”
I’d also ask:
“How much could it cost me over the next 25 years if I don’t convert?”
That is the calculation worth doing.
