This article appeared in the Albuquerque Journal on June 8, 2025. See end of article for editor’s note.
The History
Let’s start with some basics. Traditional IRAs (Individual Retirement Accounts) were introduced in 1975. They were a new retirement savings vehicle that allowed investors to contribute to an IRA, and take a tax deduction each year they contributed. The money grew tax-deferred—growing and compounding through their working years. The accounts were intended to provide a nest egg for retirement. At retirement age (after 59 ½) investors could take withdrawals from the account, and all withdrawals would be taxed as income.
In the late 1970s similar plans became available through private-sector employers. Termed 401ks, they are similar to traditional IRAs, allowing an employee to defer a portion of their paycheck into the plan, and employers often provide a partial match for the employee’s contribution. Similar plans through non-profit and government entities (termed 403b plans) became available in the early 1960s.
Although 401k plans and 403b plans have some unique differences from traditional IRAs, the tax deferral provisions (with all withdrawals during retirement being taxed as income) are the same. In recent years 401ks and 403bs have started allowing in-plan conversions to their Roth counterparts.
In 1986, new rules were enacted that required investors to start taking annual withdrawals (called “Required Minimum Distributions” (RMDs) at age 70.5. The starting age later increased to 72, then 73, and it will be age 75 for persons whose birthdates are after January 1, 1960.
In Theory…
As originally planned, the traditional IRA (and 401ks and 403bs) were brilliant. Most retirees assume they will be in a lower tax bracket when they retire, and the retirement account will provide money to pay expenses during retirement. The tax deduction for the initial contribution and the tax-deferral for many years are rich benefits, justifying the income taxes that are triggered when withdrawals begin.
Due to a strong U.S. stock market during the past 30 years, the size of retirement accounts for many investors have grown quickly.
The plan goes awry for investors who embraced the traditional IRA (and 401k and 403b) and funded them each year to the maximum allowed. The maximum contribution allowed for a 401k or 403b in 2025 for someone over age 50 is $31,000, and a new catch-up provision allows up to $34,750 for people age 60-63. The maximum amount allowed in 2025 for employer and employee contributions is $70,000. Some small-business plans allow even more.
So, What’s the Problem?
The problem is many investors have traditional IRAs (and 401ks and 403bs) that have grown to over $1 million. Fidelity Investments reported 537,000 401k accounts contained over $1 million in 2024.
Many people in their 50s or 60s are looking forward to retirement and are now realizing that these large accounts will trigger large RMDs and very high taxes. (This has been termed a “tax bomb.”) When they consider the Social Security benefits they expect to receive, plus a possible pension and investment income, they discover they will NOT be in a low tax bracket during retirement. They also realize they may not need the large RMDs for living expenses.
That’s where Roth conversions can help, because Roth conversions transfer money from a tax-deferred account into a tax-free account. Roth IRAs do not have RMDs, and they offer significant estate planning benefits if you want to leave the account to children or grandchildren.
However, taxes must be paid each year on the amount that is converted. Roth conversions—in essence—are pre-paying the taxes to get the money into an account that will be tax-free going forward.
But Roth conversions are not for everyone. Here are 10 reasons why they may not be a wise option for you.
10 Reasons NOT to Do a Roth Conversion
- Your traditional IRA (or 401k or 403b) is not large, and you do not expect your RMDs to be too large. In addition, you anticipate needing the money for expenses during retirement.
- You plan to leave your traditional IRA to charity when you die.
- You expect your future tax rate during retirement to be less than your current tax rate.
- You do not have money in an after-tax account (such as a savings account or a taxable brokerage account) to pay the taxes on the amount you convert.
- You expect your children or grandchildren to be in a lower tax bracket than you are if they inherit your traditional IRA.
- You believe Congress will change the rules and tax Roth IRAs in the future.
- You hate the idea of paying any income taxes sooner rather than later.
- You are age 63 or over, and suspect a Roth conversion may trigger IRMAA (Income-Related Monthly Adjustment Amount) surcharges (on Medicare premiums beginning at age 65 but based on income two years before, starting at age 63).
- You are receiving Social Security benefits, and suspect a Roth conversion may (1) increase the amount of federal taxes you will pay on your Social Security income, (2) trigger New Mexico state income taxes on the amount of Social Security you receive, or (3) trigger NIIT (Net Investment Income Tax). These are tax-planning issues that must be considered.
- A Roth conversion sounds too complex. You’ll take a wait-and-see approach.
For most investors, the traditional IRA will continue to serve them well during retirement. For investors who have accrued a very large traditional IRA, there are tax and estate planning concerns.
The Tax Man Cometh (via the RMD)
The amount of the RMD starts at 3.77% of the balance in the account at age 73 (and 4.06% at age 75 if you are born in 1960 or later). The withdrawal percentage increases as you age, and is currently 4.95% at age 80, 6.25% at age 85, and 8.2% at age 90.
If you are age 73 and you have $500,000 in a traditional IRA (or 401k or 403b) on December 31 of the prior year, your RMD (at age 73) will be approximately $18,850. That is not excessive and doesn’t seem like it would cause tax problems.
Let’s look at another example. Let’s assume you are age 50, you have $500,000 in a 401k, and you are contributing the maximum amount to it each year.
Without any contributions (just with the Rule of 72, which states the value will double in 10 years if you average an annual return of 7.2%), the account will double (to $1 million) by the time you are 60, will double again (to $2 million) by the time you turn 70 and $3 million by age 75 when you must begin taking RMDs. This would result in an RMD at age 75 of $121,800 ($3 million x 4.06%).
However, you’re contributing to the account each year, so it could conceivably double in six years, causing it to be almost $8 million by age 74, just before you must start taking RMDs. If the current tax laws do not change, the RMD would be $324,800 ($8 million x 4.06%) when you are 75 and must take your first RMD. Yikes! That’s a tax bomb!
What About My Beneficiaries?
Number 2 above also needs an explanation. Because traditional IRAs (and 401ks and 403bs) are tax-deferred during your working years, taxes are due during retirement. The IRS requires that someone pay the taxes, unless you leave your IRA to a charity. Most people want to leave their traditional IRA to a loved one, so that person must pay the taxes.
If you leave your traditional IRA to a child or grandchild (or any non-spouse beneficiary), that person will pay taxes on the full amount. The Secure Act 1.0 passed in December 2019 requires the full amount be withdrawn (and taxes paid) within 10 years after your death. (The old “stretch” provisions for traditional IRAs are no longer valid).
If you leave a Roth IRA (rather than a traditional IRA) to a non-spouse beneficiary, the full amount must still be withdrawn within 10 years after your death. However, there are no taxes due.
Roth IRAs offer significant tax and estate planning benefits, and they will be discussed in next month’s column.
Editor’s Comment: Donna Skeels Cygan’s column “Invest in Joy” appears in the Albuquerque Journal on the first Sunday of each month. During the next three months, she is going to take a deep dive into the pros and cons of Roth conversions. Today’s article focuses on “10 Reasons NOT to Do a Roth Conversion.” Her article on July 6 will cover “The Many Benefits of Roth Conversions,” and on August 3 she will delve into “Strategies to Consider for Roth Conversions.” Donna has been writing a monthly column for the Albuquerque Journal for 10 years on how to manage—and enjoy—your money.
Donna Skeels Cygan, CFP®, MBA is the author of The Joy of Financial Security. She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at [email protected].