Deciding whether to convert a traditional 401(k) to a Roth can feel like a guessing game — one that depends on how your income, tax rates, and retirement timeline evolve over time. But it’s really about understanding the trade-offs between tax-deferred growth and after-tax flexibility.
Understanding the Core Trade-Off
The traditional 401(k) strategy assumes you’re earning more today than you’ll withdraw in retirement. You defer taxes now, expecting to pay a lower rate later when you’re no longer working. For many people, that works as intended.
But as your 401(k) balance grows, so does your future tax liability. Every dollar in that account is eventually subject to income tax. When you reach your seventies, required minimum distributions (RMDs) kick in — forcing withdrawals whether you need the cash or not. Those distributions can create large, unexpected tax bills at a time when many retirees would rather keep their income lower.
If you’re still working and your tax rate isn’t likely to fall in retirement, the original assumption behind deferring taxes may no longer hold. In that case, it may be worth shifting new contributions toward Roth accounts or a taxable brokerage account, where future withdrawals are more flexible.
Timing and Tax Brackets Matter
If your 401(k) is already heavily tax-deferred, timing becomes the key to minimizing conversion costs. The first step is running projections — estimate your expected withdrawals and the impact on your marginal tax rate.
Not all tax brackets are equal in this analysis. The largest jumps occur between 12% and 22%, and between 24% and 32%. Converting within the lower end of a bracket can make sense, but crossing into the next tier can cause unnecessary drag.
Historically, today’s 22% and 24% brackets are relatively low. Given persistent federal deficits, there’s a fair argument that tax rates could rise in future decades. Strategically converting within those brackets can help hedge against that possibility — as long as you don’t convert so much that you push yourself into higher rates later.
The Case for Partial Conversions
In most cases, gradual, partial conversions strike the right balance. They allow you to take advantage of favorable tax rates without overpaying upfront or missing lower-rate opportunities later in retirement. Think of it as a “Goldilocks” approach: not too much, not too little.
When Conversion Doesn’t Make Sense
If your analysis shows conversion creates too heavy a tax hit, there are still smart ways to manage the tax burden on future distributions. One strategy is Qualified Charitable Distributions (QCDs) — directing required withdrawals to charity, which can reduce taxable income.
It’s also worth rethinking asset location. If you hold both Roth and traditional accounts, assign high-growth assets like equities to the Roth and lower-growth assets such as bonds to the traditional account. That approach helps slow the growth of future RMDs while maximizing the tax-free potential of your Roth.
The Bottom Line
There’s no one-size-fits-all answer to whether a Roth conversion makes sense. The right choice depends on your current and future tax brackets, spending needs, and estate goals. For many high-net-worth families, the best path is a measured one — combining partial conversions, smart asset placement, and ongoing tax projections to preserve flexibility over time.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on Roth conversions and retirement tax strategy, listen to the full podcast episode here.