Should I Convert My Entire IRA To A Roth All At Once?

Summary

Episode Summary: Should I Convert My Entire IRA To A Roth All At Once?

Podcast Title: Ramsey Everyday Millionaires
Host/Author: Ramsey Network
Episode Title: Should I Convert My Entire IRA To A Roth All At Once?
Release Date: August 6, 2025

In this insightful episode, the Ramsey Network delves into the complexities of Roth IRA conversions, providing valuable guidance for individuals contemplating whether to convert their entire Traditional IRA to a Roth IRA in a single transaction or to spread out the conversions over several years. Hosted by a member of the Ramsey Network team, the episode features a thoughtful discussion with Ann, a listener seeking advice on her recent Roth conversion experience.

Introduction

The episode begins with a brief introduction by the host, mentioning the sponsorship by SmartVestor. The conversation swiftly transitions to the main topic as Ann joins the discussion.

Listener's Concern: Ann's Roth Conversion Experience

Ann's Dilemma:
Ann shares her recent experience of converting $100,000 from her Traditional IRA to a Roth IRA. She expresses regret over the significant tax bill she incurred, which unexpectedly increased her tax bracket from 24% to 32%. Concerned about managing taxes efficiently, Ann contemplates whether it's wiser to "dribble" out the conversions by moving $50,000 to $100,000 annually instead of converting the entire amount at once.

"I just need a little wisdom." (00:28)

Host’s Initial Advice

The host begins by clarifying the concept of marginal tax rates, emphasizing that Ann's entire income wasn't subject to the higher 32% tax rate—only the portion exceeding the 24% bracket.

"The whole thing. If you move 2.3 million, most of it would be at more than 32%. It would bump on there." (01:25)

Key Considerations in Roth Conversions

1. Total Conversion Amount:
   Ann reveals she intends to convert a sizable $2.3 million IRA. The host highlights the importance of understanding how such a significant conversion can impact her tax bracket and overall tax liability.

2. Age and Required Minimum Distributions (RMDs):
   At 71 years old, Ann is subject to RMDs, which compel her to withdraw a certain amount from her Traditional IRA each year, thereby affecting her taxable income.

   "And so you're going to have to take out a 10th a year." (07:21)

3. Inheritance and Estate Tax Implications:
   The host explains the recent changes under the Biden Secure Act, noting that inherited Traditional IRAs are fully taxable to beneficiaries over a 10-year period. Converting to a Roth IRA can alleviate the tax burden on heirs and eliminate the need for RMDs.

   "So anytime you can move stuff to Roth, you do not have required minimum distributions because you've already paid the taxes and it's tax free and your kids don't have any tax." (08:21)

4. Tax Efficiency and Bracket Creep:
   The discussion emphasizes the importance of spreading out conversions to minimize bracket creep—the phenomenon where additional income pushes taxpayers into higher tax brackets, resulting in disproportionately higher taxes.

   "I just don't want to jam you all the way up in the top bracket and do it all at once because that's going to cost you an extra 10% versus doling it out over some number of years." (04:25)

Professional Guidance and Planning

The host advises Ann to consult with tax professionals to tailor a conversion strategy that aligns with her financial situation and long-term goals. Utilizing resources like Ramsey's ELP (Expert Leveraging Partners) can provide personalized tax and investment advice to optimize the conversion process.

"Get two opinions. Then go to ramseysolutions.com and click on ELP for tax provider." (03:25)

Alternative Strategies: Charitable Remainder Trusts

Ann briefly mentions Charitable Remainder Trusts (CRTs) as an alternative strategy. The host explains that while CRTs can offer tax deductions and estate planning benefits, they involve transferring control of assets to a charity, which may not align with everyone's financial objectives.

"Charitable remainder trust has nothing to do with this...you lose control of the money." (05:50)

Final Recommendations and Conclusion

Concluding the discussion, the host underscores the importance of proactive tax planning and the benefits of converting to a Roth IRA when feasible. By paying taxes upfront and eliminating future RMDs, individuals can enhance their financial legacy and provide tax-free inheritances to their beneficiaries.

"When people should start making those conversions: As soon as you can pay cash for the taxes that it creates." (08:21)

Notable Quotes

• Ann: "I just need a little wisdom." (00:28)
• Host: "The whole thing. If you move 2.3 million, most of it would be at more than 32%. It would bump on there." (01:25)
• Host: "I just don't want to jam you all the way up in the top bracket and do it all once because that's going to cost you an extra 10% versus doling it out over some number of years." (04:25)
• Host: "Get two opinions. Then go to ramseysolutions.com and click on ELP for tax provider." (03:25)
• Host: "So anytime you can move stuff to Roth, you do not have required minimum distributions because you've already paid the taxes and it's tax free and your kids don't have any tax." (08:21)

Final Thoughts

This episode serves as a comprehensive guide for individuals considering Roth IRA conversions, especially those with substantial Traditional IRA balances and complex estate planning needs. By highlighting the interplay between tax strategies, RMDs, and inheritance considerations, the Ramsey Network equips listeners with the knowledge to make informed financial decisions that align with their long-term wealth-building goals.

Transcript

[A]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Ann is with us. Ann is in New Orleans. Hi, Ann. Welcome to the Ramsey Show.

[B]

Hi. I hope I'm smarter five minutes from now.

[A]

I can't promise that.

[B]

So I'm a little late to this Roth conversion party and last year I moved $100,000 from my IRA to a Roth and got a very rude awakening with my tax bill because we went from 24% to 32%. And so I just wondering, is it better to just take the poison pill and move it all, dribble it out 50 to $100,000 a year? I mean, somebody's talking about charitable remainder trust, but that seems too complicated for me and I don't want to do something that I can't understand. So I just need a little wisdom. Yeah.

[A]

How much is it total that you're trying to convert?

[B]

2.3 million. Oh, wow.

[A]

Okay. Well, the. I'm sure you probably already understand that the whole tax bill did not move to 32%. We have what's called a marginal tax.

[B]

Right, Right. Correct.

[A]

So just, just the last portion moved to 32%.

[B]

Right.

[A]

The whole thing. If you, if you move 2.3 million, most of it would be at more than 32. It would bumped on there. How old are you?

[B]

71.

[A]

And so you got RMDs breathing down your neck.

[B]

Correct. And I didn't know. I just learned, you know, recently about the inheritance penalty for my adult children.

[A]

It's not a, it's not a penalty. They're going to pay all it is, they're going to pay the taxes and they have to withdraw it over a 10 year period of time. Yeah, well, yeah, but it's not a penalty. It's just you haven't paid the taxes. So they get to the 2.3 is not tax is taxable now. And if it's left to them in an inherited ira, it will be taxable to them, but it's not an inheritance tax or a penalty. Okay, so the RMDs come into play and the inheritance issue comes into play. So we'll start with the premise of all of it. Being in Roth is best for both things, obviously, because you got no RMDs and you got no problem on the inheritance transfer. The then the question is what is the wisest way to schedule the movement mathematically? How much do you want to move and how often? Because you're going to get to RMDs no matter what we do unless we chunk this thing. And so because your RMDs are 74 now, I believe so you just got a couple years. So do you have a good tax attorney or accountant?

[B]

I thought I did, but I think I might need a better one.

[A]

Okay. So what I would do is get two opinions. Then I would get your guys or gals opinion and Then go to ramseysolutions.com and click on ELP for tax provider. And what I want to do is I want them to sit down with you and you could. Do you have a great investment advisor?

[B]

I do.

[A]

Okay. You might even get a third set of calculations there because what I'm trying to calculate is against the RMD problem. I want to move it as fast as I can move it tax efficiently. You're going to get some bracket creep. I just don't want to jam you all the way up in the top bracket and do it all at once because that's going to cost you an extra 10% versus doling it out over some number of years. If it's going to take 15 years, I'm just going to take some tax hits. But if I can dole it out over five or seven years and not get completely and save, I don't know, $150,000 in taxes, which might be the case, then I'm going to create a staged mathematical formula that runs it out with the least bracket creep over the shortest number of years. Did that make any sense?

[B]

It makes a lot of sense.

[A]

Okay. And I don't know how to do that in my head right now on the radio, but I think I could do it if I sat down. Might take me 30 minutes or something. But I think your investment advisor and, or a couple of tax people could run it and then you could look at their different ideas of which way to do this. I think if it's going to take 15 years that the RMD and even the estate tax concerns, the RMD math and the estate tax concerns are going to overtake what tax savings you would get. So I'm not going to take 15 years. I'm going to move it and I'm going to move it in under a decade. But I don't, but I don't know what the implications of that are mathematically I got to back that out in my head. So in terms of the bracket creep. So that's what I'm trying to get it out of there to where you're going to have some rmd and that's the trade off for not getting as much bracket creep as you would get. You could do no RMD and just divide it by. You said you're 74 divided by four years. Right. We could do 500 a year if you weren't concerned about bracket creep. But that's going to jam the bracket.

[B]

Every year right now you didn't say anything about that. Charitable remainder trust I've taken.

[A]

Charitable remainder trust has nothing to do with this. Except that you could move the money anytime you, whether it's in there or not. You can move money into this and take a write off, but you lose control of it. You've designated the money to a charity, you get to live off of the income of the trust, but you no longer own the money.

[B]

Okay.

[A]

And you're taking a charity write off for that. And that's an estate tax move usually. Or someone that's wanting to ensure that their money goes to a certain charity, a qualified charity. But the downside is you lose control of the money and obviously it is not going to errors either then.

[B]

Yeah. Okay. All good things. Well, thank you. I think I am a little bit smarter, but I'll talk to some more smart people.

[A]

Oh yeah, I think you're going to have to talk to ones that have got more time on their hands than I do on a radio call to be able to crunch the numbers. But that's the concepts. I mean there's three or four things pulling at this from different directions. So the, the thing she's alluding to that, let's talk about it for a second is James, when do RMD start? Pull that up to make sure. I think it's 74. They moved it to required minimum distributions. So if you have non Roth traditional IRAs or 401ks, they have not gotten their tax money yet and they required minimum distributions beginning, I believe it's at 74 years old.

[B]

I think you're right.

[A]

And you get taxed on the amount that they require you to pull out. And they require you to pull it out. It's probably over a 15 year period of time or something like that. It's got a formula.

[B]

The IRS hasn't updated it, but it says if you reach age 73 in 2024.

[A]

So this is outdated.

[B]

Your first RMD is due by April 1, 2025.

[A]

Yeah. So 74. Yeah, that's what I thought. So right now it's 74. And then the other thing is if you if under the Biden Secure Act. Yes. If you have an inherited IRA, that's a traditional or inherited 401k. That's a traditional, meaning you named a beneficiary on your, on your program. You leave it to your kid. 100% of that is taxable because it hasn't been taxed yet. And they're on a timeframe and it's on a 10 year timeframe. You have to take out a 10th a year. And so you're gonna get hammered there. So anytime you can move stuff to Roth, you do not have required minimum distributions because you've already paid the taxes and it's tax free and your kids don't have any tax.

[B]

That's right.

[A]

So it's tax free and there's no required withdrawal. So there's no benefit. Well, there's a benefit to leaving it in there because it's still continuing to grow tax free in the inherited side. But the either way, the Roth is vastly superior to traditional for those two reasons. When you get into your estate planning, edge of things. So tell people when they should start making those conversions. As soon as you can pay cash for the taxes that it creates. And that's what she was trying to calculate.