When to Contribute or Convert to a Roth Account

In this episode of Motley Fool Hidden Gems Investing, Motley Fool retirement expert Robert Brokamp Robert Brokamp discusses when a Roth makes sense with Wade Pfau, the founder of RetirementResearcher.com, the director of retirement research at McLean Asset Management, the co-host of the Retire With Style podcast, and the author of more than 60 research articles and four books, including The Retirement Planning Guidebook.

Topics covered:

• Who should contribute to or convert to a Roth account?
• Why thinking just in terms of tax brackets doesn't paint the whole tax picture.
• The sometimes-faulty assumptions made by online tools.
• Why Roth accounts benefit retirees who may be subject to substantial required minimum distributions or Medicare surcharges.
• What types of investments are best for Roth accounts.

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A full transcript is below.

This podcast was recorded on Oct. 24, 2026.

Robert Brokamp: The pros, cons, and underappreciated benefits of Roth accounts this week on the Saturday Personal Finance Edition of the Motley Fool Hidden Gems Investing Podcast. I'm Robert Brokamp, and you may have heard this old saying about investing. It's not what you make. It's what you keep. Because you aren't the only owner of your portfolio, you have a co-owner named Uncle Sam, and he eventually will want his share in the form of taxes. However, you can limit how much of your returns you lose a taxes by investing in a Roth retirement account, which offers tax-free growth and withdrawals. But there's a trade-off. A year when you contribute or convert to a Roth, you usually pay more in income taxes. You to explain when a Roth makes sense is Wade Pfau. Wade is the big brain behind retirement researcher.com, the director of Retirement Research at McClain Asset Management, the co-host of the Retire With Style podcast, and the author of more than 60 research articles and four books, including the Retirement Planning Guidebook, which is one of my favorites. Wade, welcome back to the show.

Wade Pfau: Thanks. It's great to be here. Thanks for the invite.

Robert Brokamp: Let's get right into it here. For someone who is still saving for retirement, who should be contributing to a Roth account versus a traditional account?

Wade Pfau: The reality is we have to pay taxes someday, but we want to look for opportunities to pay taxes at lower rates. The traditional account, you get a tax deduction now, but then you pay taxes in the future on distributions, the Roth account. It’s after-tax money; you pay taxes on your contributions, but then in the future, for qualified distributions, you don’t pay taxes. It makes sense to pay taxes now if you can do so at lower rates today than in the future. That's really when we talk about Roths; the most likely candidates for folks to contribute are maybe younger, early in their careers. They may have lower earnings relative to the future, or maybe people who are late in their careers, may be doing part-time work at that point, have lower incomes, facing lower tax rates. The best candidates for contributing to Roths are just those who can go ahead and pay the taxes now because they're looking at pretty low rates relative to what they might face in the future.

Robert Brokamp: Part of that is projecting where your rates will be in retirement. There are two aspects of this. Will your tax bracket drop in retirement? Then the other question is, do you think tax rates will go up because of government underfunding, Social Security underfunded, Medicare underfunded. Let's start with the first part. Do most people drop into a lower tax bracket once they retire?

Wade Pfau: We do want to be clear: it’s not just tax brackets, because there are a lot of other things in the tax code. But yes, to the extent that once you leave the labor force, if a big chunk of your taxable income every year was through earnings from work, there's a reasonable chance that you might end up in a lower tax bracket in retirement, for sure.

Robert Brokamp: How much weight do you put in the argument that at some point, tax rates have to go up because the government continues to spend more than it makes? We have the Social Security Trust Fund probably being depleted here in the next several years, Medicare as well. People think, rates have to go up, so I'm going to hedge against that risk by having more in Roth accounts.

Wade Pfau: I think there's an element of that being a reasonable decision to make. It's very hard to know what the future will bring in terms of tax rates, but certainly there are pressures, and we really have historically low tax rates right now. I think it's hard to predict the future, but to the extent that you're concerned tax rates might be higher in the future, that might have you lean towards then considering a Roth today. Now, if you're in the very highest tax brackets today and you do anticipate retiring and potentially being in lower tax brackets in the future, even with an increase in tax rates, you might still face lower tax rates in the future. But certainly, if you're on the fence about, I don't know, really whether I'm going to face a lower tax rate in the future than today, yes, the concern that tax rates could go up could push someone towards considering the Roth today.

Robert Brokamp: There's the decision of contributing to the Roth, and for many people, they've already been contributing to a traditional account for many years. In fact, the majority of retirement assets are in traditional accounts; according to the Investment Company Institute, only 12% of IRA assets are in Roth IRAs. But if you have a lot of money in traditional accounts, it's not too late. You can convert them to Roth assets. The amount you convert will be added to your taxable income in that year, but then the money grows tax-free. Is there any additional considerations beyond what we talked about in terms of whether someone should convert some of their money to Roth assets?

Wade Pfau: It's really the same logic. It's the idea that we know we have to pay taxes at some point. With IRAs, even if you leave them behind to your adult children beneficiaries, they'll have to pay taxes, and they're looking increasingly at a 10-year window to distribute from those accounts when they may be in their peak earnings years. You got to pay taxes at some point. Really, it's if I'm facing lower tax rates today and I'm still working, I might contribute to the Roth, and I might have capacity or early retirement, maybe before I've started Social Security and other things like that. I might consider a Roth conversion to pay taxes at the lower rates today, and to better protect myself in the future, especially when required minimum distributions begin, and depending on your birth year, that's either age 73 or 75 now.

But that can lead to surprises for people if a significant chunk of assets are in traditional IRAs or 401(k)s, tax-deferred accounts. They don't have to spend their RMDs, and they may not want to spend it, but they have to take it out and pay taxes on it. That can lead to quite a big surprise where if you have a lot of assets, you might end up in a higher tax bracket, even though you're not really spending that money. You could reinvest in a taxable brokerage account, but you do have to pay the taxes, and that can be a real shock to folks. That's really the motivation for considering Roth conversions when you might be able to pay taxes at a lower rate today.

Robert Brokamp: You touched on this a little bit, but it's not just taxes and tax brackets, but having to take out large RMDs will increase your adjusted gross income, which could have other effects on other aspects of your finances, including what you pay if you're getting healthcare through Medicare or the ACA, or maybe your eligibility for other tax deductions or credits. It's not just the tax bill.

Wade Pfau: When you're forced to take out income or when you have a higher adjusted gross income, that can impact how much tax you pay on Social Security benefits, whether you face Medicare premium surcharges two years in advance so starting at age 63 if Medicare is going to begin at 65, whether you're eligible for subsidies from the Affordable Care Act, if you're getting your health insurance that way. There's all kinds of tax deductions now that phase out with income, so you might be losing tax deductions as you have a higher income. Then a big one that I think isn't appreciated as much and maybe really important, especially after retirement. How your capital gains.

Your preferential income sources, long-term capital gains and qualified dividends. They have their own set of tax rates, starting at 0%, then 15%, then 20%. Those stack on your other income. There's this interesting thing that can happen. If you're in the 12% ordinary income tax bracket, you take another dollar out of your IRA. If you also have long-term capital gains, it's possible that that could also push a dollar of gains from the 0% to the 15% bracket. Suddenly on that dollar, you're paying 12%, plus, it's forcing you to pay another 15%, you're facing a 27% effective marginal tax rate with this preferential income stacking issue where you're pushing your capital gains into the 15% bracket. That can also happen with the net investment income tax of 3.8% and also at the period where you go from the 15 to the 20% preferential income bracket.

Robert Brokamp: Now, so there really are a lot of moving parts here. It's not just the tax bracket. That's said, you will read guidance from experts, folks in the media saying that you should convert up to a certain amount, and it's usually a certain tax bracket. Maybe under the 22% tax bracket, sometimes folks are moving it up under the 24% tax bracket. But my guess is that you don't think that's fully solid advice or at least not comprehensive advice.

Wade Pfau: No, I'm really concerned a lot of the financial planning software that's out there for do-it-yourself consumers is really focused on this idea of filling tax brackets. Unfortunately, that's not a very effective approach. That's the wrong way to think about things. It's not just tax brackets. It's the effective marginal tax rate. If you're working your way through the 22% bracket, you might want to stop before you trigger an IRMAA surcharge instead of continuing through that to the end of the 22% bracket. That's one of many instances where really, you want to think about all the different tax impacts of generating income, not just the federal income tax brackets. Any software that just has the filing tax brackets is really misguided, unfortunately, because that's what a lot of the software out there is doing.

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Robert Brokamp: Just about every financial services firm does provide some calculator. Should I contribute to a Roth or traditional? Should I convert to a Roth? Do you put much weight into those?

Wade Pfau: The idea there is, I guess I don't know how each of these calculators might set it up, but it's really if you can do at a lower effective marginal tax rate today than in the future, that's really what those calculators are looking at. If they're trying to help you determine whether you can do so at a lower rate today than in the future, then I think that's reasonable. There could be a lot of different ways to set up calculators of that nature. Some may be too overly simplified, some might really be effective. It's really hard to say.

Robert Brokamp: One thing that I think is an interesting assumption, maybe an overly optimistic assumption about some of these calculators, is that when you are deciding between the traditional and the Roth, it usually presumes something like, if you're going to contribute to a traditional, you're going to have some tax savings. Then you're going to turn around and invest those tax savings. You're going to actually do the math and say, I'm contributing $10,000. I'm in the 22% tax bracket. I'm going to save $2,200 in taxes, so I'm going to make sure I contribute that $2,200 to either more under the IRA or 401k) or in a taxable brokerage account. But I frankly don't think most people think of it that way. I almost consider the Roth as a way to force yourself to save more on an after-tax basis because I don't think people are really doing everything that these calculators are assuming.

Wade Pfau: That's an important point, and just laying out some numbers. Suppose you're going to face a 22% rate or in the 22% bracket that's actually applying to you, and so you're thinking about putting $1,000. Or you have, say, $1,220 available approximately; if you put that into a Roth, you’d pay the taxes — $220 of tax is approximately; I’m having to round a little bit here. Then you get the full $1,000 into the Roth, whereas with a traditional IRA, you could put the full $1,000 in as well. Suppose you're maxed out at that point. Then you would have to put that other $220 of tax savings into a taxable brokerage account. That faces ongoing taxation over time as well. The issue is with the Roth: you really own 100% of it at that point, but with a traditional IRA, the government owns a portion of it, and we don't know exactly what portion that's going to be because that's really the tax rate that applies when you distribute from the account. But you don't own the full $1,000 in there. If you're going to face a 22% tax rate in the future, you only own 78% of what's in that account, and the government owns the other 22%. Absolutely. It's important to think about that point and to think about how you really have to invest in a taxable brokerage account outside of that, as well to be on an equal footing. I agree with you 100% about. I don't know if people always appreciate that aspect of things.

Robert Brokamp: Let's get into the nitty-gritty of paying taxes when you contribute or convert to Roths because in the United States, we're generally expected to pay enough taxes throughout the year. For someone who decides, You know what? I'm going to switch from contributing to the traditional account to Roth account or converting assets to a Roth account, what should they do, if anything, to account for the fact that their tax bill is going to be higher?

Wade Pfau: This is really the hardest part of trying to write software to help solve these things, is because for each dollar you convert, you now also have to face a higher tax bill, and so you have to account ahead for the additional distributions needed to cover those taxes. If it was just one single tax rate, there's a basic formula that tells you how much you need. It's just one divided by one minus the tax rate is what you would need to multiply the Roth conversion by to know the total amount you'd have to take out to also cover the tax bill. But the problem is, with all these different quirks in the tax code, the tax rate on each dollar of income can be jumping all over the place, and Medicare premium surcharges are a classic example of you could face 100,000% tax rate on a dollar when it's the dollar that puts you over the threshold for the next Medicare surcharge. It becomes a lot more complicated to monitor all that.

Now, with Medicare, there's a little bit of complication because really, that's not going to apply until two years later. It's an extreme example, but that's an issue that does make it harder. You need to account for when you're doing the calculations of how much to convert, how much additional taxable income that will create, how much you're going to have to take out to pay that tax bill, which then in turn, means you're going to have to take out more to cover the additional taxes you just calculated, which means you have to take out more to cover those additional taxes, and you can get yourself into a loop. There might be one relief mechanism is just if you're doing Roth conversions late in the year, which is pretty much the best time to do it because you have a better sense of what your overall income picture would look like. If you can wait until after January 1st to pay that estimated tax bill, then you're pushing that problem into the next year, but it really becomes a starting point for the next year that you already have this much income. You don't have to worry about all these looping tax calculations when you're able to push it to the next year.

Robert Brokamp: That's a good way to describe it, the looping tax calculation because it doesn't apply just to the conversion. I think it applies to spending in retirement in general, because the more you spend on anything, you may have to be taking more out of your traditional accounts or selling assets in your taxable brokerage account. Then you have to pay those taxes, which means you have to take more out, and then you have to pay taxes on those taxes. It can be pretty complicated.

Wade Pfau: It can. It makes the calculations a lot more difficult to run, for sure.

Robert Brokamp: Which, of course, I guess, argues again for having more Roth assets because then you don't have to worry about it because you owe the complete account, and you don't have to worry about what I often call the tax cascade when you are taking about money of your traditional IRA.

Wade Pfau: That's the beauty of the Roth account. It stays out of your adjusted gross income. It doesn't impact how much of Social Security's tax or anything else. It's very convenient from that perspective to have spending sources in retirement that don't generate tax problems.

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Robert Brokamp: Let's move on to a related topic. Let's say people are saying, I agree. I should have a Roth account, they decide to open it or convert. What should they put in that account? This is really the topic of asset location. Which types of investments are best to put in Roth accounts?

Wade Pfau: To walk through all three options with taxable brokerage accounts, that's where you generally want your high growth potential, but tax efficient. Maybe if you own any stock index funds, things of that nature to benefit from the long-term capital gains, tax deferred accounts, that's usually less tax efficient, but maybe lower return potential. Things like your bonds and so forth. Then the Roth you're looking at maybe assets that were less tax-efficient but that have higher long-term growth potential, so that you can get a lot more growth there over time, over the long term. These are accounts you may hold for a very long time, and you're really centralizing this growth opportunity in a space where you're not going to have to pay taxes on that growth. Maybe the less tax-efficient stock indices that you have or different securities that you have that have a higher long-term growth potential.

Robert Brokamp: There are two aspects of that for me. The Roth is the tax-free account, so that's the one you want to grow the most. But the idea of putting the tax-inefficient but slower-growth assets in the traditional account is a strategy for minimizing RMDs, because one of the determinants of your RMDs will be the size of those accounts. You, of course, want them to grow. You want all your investments to grow, but that's the account you may want to grow the least.

Wade Pfau: Of course, asset allocation is always the first consideration. It's just a matter of, to the extent you have the room, this is how you want to organize things. Generally, bonds are better served in the tax-deferred accounts, the IRAs, the 401(k)s, not necessarily in the Roth because you really want the growth opportunities as much as possible in the Roth account.

Robert Brokamp: Let's have our final question here. If you could give one piece of advice to a listener who has been thinking about the Roth, but really has been putting off making a decision. What do you think people should do? What's the first step they should take to finally decide whether the Roth is right for them?

Wade Pfau: I would encourage them to at least make some small contribution at some point to a Roth because there is a rule out there that you have to have at least one Roth IRA open for five years, even if you're well over the age 59.5, before you can make a qualified distribution from it. You definitely want to get that clock running so that five years have passed before you're getting to the point of wanting to take distributions. It just gives you that more flexibility for deciding whether or not to use a Roth more. Maybe a lot of the hurdle is it can be work to set up a new account. If you force yourself to at least put $1,000 into a Roth, get it set up, get it going, get that five-year clock running, that could be a great first step towards then really having the flexibility of doing what's best for your money rather than just, hey, I've got this other account open already, so I'm just going to put it there and not have to worry about opening a new account.

Robert Brokamp: The five-year rules are pretty complicated, and I think maybe slightly underappreciated. It is good to get that clock going, particularly for folks who get that clock going in Roth IRA because a lot of folks have their Roth assets in a 401(k). But then if they were to transfer that money in a 401(k) to an IRA and yours is your very first IRA, you start a whole new five-year clock. It's good to get that clock going soon.

Wade Pfau: Your Row 401(k) would have a separate five-year clock, but the Roth IRA world, it doesn't have to be the same Roth IRA, necessarily, but you need some Roth IRA open for at least five years before you can make a qualified distribution from a Roth IRA.

Robert Brokamp: This has all been excellent advice, Wade. Thank you again for joining us.

Wade Pfau: My pleasure. Thank you.

Robert Brokamp: That, my Fools friends, is the show. Thanks so much for listening, and thanks to Bart Shannon, the engineer for this and every Saturday episode. As always, people on the program may have interest in the investments they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial standards. It is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.

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