Roth Strategy Boosts Nest Egg

Roth IRAs

A Roth Strategy to Cut RMDs, Boost Your Nest Egg

A staggered conversion strategy helps minimize taxes owed over time.


For retirees who don't need the money, having to take required minimum distributions from a traditional IRA and pay tax on the withdrawals can be painful. But by shifting money from a traditional IRA to a Roth IRA over time, you can minimize future required withdrawals. And the earlier you start a staggered conversion strategy, the bigger the payoff, according to analysis by investment firm T. Rowe Price.

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Clients "hate the idea of having to pay taxes on money they don't need," says Judith Ward, senior financial planner for T. Rowe Price. The firm found shifting money to a Roth not only lessens RMDs but can cut an investor's total tax bill and lead to a larger nest egg.

With a staggered conversion strategy, you convert money from a traditional IRA to a Roth IRA every year over many years. Step by step, you pay Uncle Sam now to free the money's future growth from his clutches. By converting small chunks over time, you minimize the tax owed on the conversions.

Original owners never have to take payouts from their Roth accounts, so the money can potentially grow tax-free for decades. Ward says converting funds to Roth IRAs is ideal for those who think they won't need to tap their traditional IRA for living expenses.


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Putting the money in a Roth gives you a tax-free bucket to pull from as needed. If you suddenly have a major expense, tapping the Roth won't trigger a tax bill. "You have a little more control over your taxable income," says Ward.

How the Numbers Play Out

In its analysis, T. Rowe Price looked at four scenarios: doing no Roth IRA conversions, and staggering annual Roth conversions starting at age 55, at age 60 and at age 65. In the conversion scenarios, the investor converts $40,000 a year to a Roth IRA until age 70.

The analysis considered a hypothetical married investor with an annual household income of $190,000, putting the couple in the 28% tax bracket. At age 54, the investor has $500,000 in a traditional IRA and $130,000 in a taxable account. He continues to contribute $6,500 a year to the traditional IRA until age 65. The tax on each conversion is paid from the taxable account. When RMDs begin at age 70½, the money is reinvested in the taxable account, growing at a tax-adjusted rate of 4.32%, and the IRAs are assumed to grow an average of 6% a year. The analysis looked at the results when the investor reached age 95.

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In all three staggered-conversion scenarios, the total nest egg values at age 95 were higher, and the total taxes paid on the retirement accounts were less, when compared with the no-Roth-conversion strategy. The total of required minimum distributions was less, too.


Without using a Roth strategy, the total amount in the traditional IRA and the taxable account at 95 was about $4.4 million. Starting Roth conversions at age 55 boosted the investor's nest egg to about $5.2 million—about $800,000 more. Starting the staggered strategy at age 60 resulted in a total nest egg of about $4.8 million and starting at 65 resulted in about $4.6 million.

The tax savings play a key role in the extra growth. Starting conversions at age 55 had the biggest impact, resulting in a total tax bill of $342,200—about half the tax paid in the no-conversion scenario. Starting at 60, the tax bill was about 25% less, and at 65, about 10% less.

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The earlier the staggered strategy starts, the more it reins in required minimum distributions. Doing no Roth conversions resulted in total RMDs of nearly $2.4 million between ages 70½ and 95. By drawing down the traditional IRA, total RMDs taken are cut by about 74%, to $622,000, if an investor starts the staggered strategy at age 55.