Roth Conversions; A BETR Way – Part 4 of 4
“If the future tax rate is higher than a calculated BETR, a conversion is generally considered financially sound.”
— Vanguard Group
In my previous post, Roth Conversions; No Guarantees, Part 3 of 4, we discussed some of the risk factors that could potentially reduce or completely negate the benefit of front-loading taxes via the Roth conversion process. Because the benefit of a conversion does not occur immediately but instead accrues over time, often taking 20 to 25 years to start paying off, there are significant time related risks that must be considered. A great deal can and is very likely to change over the waiting period.
Given the nature of the decision, a long-term, front-loaded bet with an extended time frame of potentially two to three decades to recoup the costs, and the virtually infinite number of variables over that period that could ultimately derail the recovery of the front-loaded taxes paid, ongoing risk management is critical to the decision to convert. By removing the fear that is often artificially created by financial sales professionals with limited technical depth and being more marginally and strategically mindful of the very real risks associated with a conversion, individuals can make better-informed decisions about whether to convert or not.
For those who believe, after careful analysis, that a Roth conversion makes sense…
In July 2025, Vanguard Research published a white paper on the subject titled, A ‘BETR’ approach to Roth conversions, referenced in the appendix. The central concept in Vanguard’s paper is the Break-Even Tax Rate, or BETR. Instead of relying on the common rule of thumb that a Roth conversion only makes sense if your future tax rate will be higher than your current rate, Vanguard introduces BETR as a more precise benchmark. The BETR represents the future marginal tax rate at which converting or not converting produce the same after-tax outcome. Put another way, a break-even point, based on known information, is utilized to decide on whether a Roth conversion makes sense or not. Note, this does not mitigate the uncertainty associated with the decades required to recoup the cost but rather provides a systematic marginal framework for the Roth conversion decision based on currently known factors.
So how does it work?...
I will use the following example from Vanguards paper to explain:
In the above example, Jill has two choices; to convert or not to convert, that is the question.
Jill is considering converting $100k into a Roth IRA and wants to weigh the point at which this decision begins to make sense based on a future marginal tax rate assumption. Using Vanguards logic, if the BETR is below Jill’s future tax rate, the conversion will make sense. If not, she should not convert the assets. How is the BETR calculated?
The BETR is calculated by comparing the unconverted future balance of Traditional IRA which is $300k, to the net opportunity cost of converting the assets $300k - $70k (discussed below).
Jill is currently in the 35% marginal tax rate. If she converts 100k to Roth now, that will result in a $35k tax bill. In the above assumption, the taxes are paid from an external taxable account rather than the converted assets. This is because paying the taxes from the converted assets is the most uninformed decision an investor can make. Both the converted, and the non-converted assets grow to $300k over a 20-year period under these assumptions.
However, what must be taken into consideration is the opportunity cost of converting the assets to a Roth, i.e. the tax bill, and corresponding assets used to pay the tax bill. In this example, the $35k in external assets used to pay the tax bill would have grown to $70k over the period in question as the assets were assumed to be sitting in savings account. This is a future opportunity cost of $70k that must be taken into consideration upon conversion.
The math...
After solving for the BETR you get...
BETR = 230000/30000 – 1 = .233% or 23.3%
Where did the $230k come from? Again, it came from the future value of the Roth account minus the future value or opportunity cost of the assets spent to convert the assets, 300k – 70k = 230k.
Jill’s FUTURE BETR in this example is 23.3%. That is below the assumed future tax rate of 24%. Ceteris paribus, she should convert vs. paying 24% on the distributions from the Traditional IRA in the future.
A major factor in this decision, is the productive nature of the asset being utilized to pay the taxes upon conversion. As stated, using the converted assets to pay the taxes is by far the worst decision you can make. It takes away from future compounding in the most tax efficient manner and negates the conversion viability. If I were to assume instead, that the $35k grows to $100k over that period, the corresponding BETR would be 33% (200/300) and thus the conversion would not make sense as this rate is above the future marginal assumed tax rate. Vanguard notes the importance of this key point. In other words, use assets with minimal tax liability upon conversion, and the least growth potential to pay the taxes on the conversion, or the BETR may not justify the conversion.
My objective here was to provide a marginal framework for the decision at hand. But what this framework does not do, is take into all unknown exogenous risk factors that can dramatically change the calculus over the decades required to recoup front loaded taxes paid.
Both quantitative and qualitative factors must be taken into consideration, but with the knowledge that uncertainty will still exist. This framework offers a limited method to assess the decision's validity, but a very meaningful one given what we know today.
Summary:
Emotions run high when advisors try to convince individuals that unless they convert their pre-tax assets to a Roth IRA, Armageddon will land at their front door. This is nothing more than a fear-based sales tactic. This just should not be the case. What should be the case, is the consideration of relevant factors to establish a central forward-looking tendency, and then marginal and rational decisions should then be made based on these factors. Will Roth conversions make sense for most, in my opinion no, but they will make sense for some. As previously mentioned, this is a probabilities business, so work with an Independent CFP® Fiduciary to help you make the most optimized, and informative decision to increase your probability of success.
Don’t take a high risk bet with your retirement assets, without a careful analysis from an objective, qualified, Fiduciary advisor. Roth conversions are a huge upfront cost, with a long payback period, and an uncertain outcome...
Want to discuss if strategic Roth conversions make sense?
Schedule a free, 30-minute, no-pressure, NO BS, introductory financial planning consultation with Fountainhead Wealth Planning.
Brett F. Anderson, CFP® CIMA® CAIA® M.S. Econ
Appendix:
A ‘BETR’ approach to Roth Conversions: https://corporate.vanguard.com/content/dam/corp/research/pdf/a_betr_approach_to_roth_conversions_072025.pdf
Do you have questions? I'd like to help. Please call me at (864) 790-3385.
Past performance is no guarantee of future returns;
this is NOT investment advice and is meant to be educational.
Please consult a qualified tax advisor before making any decisions.