Many people with large traditional IRAs are now considering switching to a Roth. The appeal is obvious: tax-free withdrawals in retirement, no required minimum distributions, and a cleaner environment for your heirs. What most people don’t seriously consider is what the switching costs will be for the current year.
Dave Ramsey took a call on The Ramsey Show from Lisa, a 54-year-old woman with $2.8 million in a traditional IRA. She and her retired husband live on $150,000 a year from the same account. She wondered if it would make sense to transfer the entire balance to Roth immediately.
Ramsey’s answer was blunt. Here’s the math behind it, and what you need to know before doing something similar with a large traditional IRA.
$2.8 million in a tax year, tax bill is $700,000
When you convert a traditional IRA to a Roth, the entire conversion amount becomes ordinary income in the year of the conversion. There is no apportionment year and no tax at the capital gains rate. Ordinary income for that year, all.
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For Lisa, a one-time redemption of $2.8 million pushed nearly the entire balance into the 37% federal bracket. Prices for married couples filing jointly will start at more than $768,700 in 2026, according to the IRS. Ramsey’s estimate of the federal tax bill is about $700,000.
“This could cost $700,000, which makes me want to puke,” he said on the show.
Alabama’s income tax is as high as 5%, which also increases taxes. The exact number also depends on the couple’s deductions and any other income they report in the year of conversion.
Ramsey’s Recommended $200,000-A-Year Strategy
Ramsey’s recommendation is to convert about $200,000 per year over six years rather than transferring the entire balance immediately.
The numbers for this approach are very different. Lisa and her husband can withdraw $150,000 per year from their IRA after returning home. With a $200,000 Roth conversion, the total for the year came to $350,000. After the standard deduction of $32,200 for a married couple filing jointly in 2026, taxable income is approximately $317,800.
The converted dollar exchange rate remained between 22% and 24%, rather than reaching 37%. Ramsey estimated the annual tax cost to be about $50,000.
Over six years, taxes totaled about $300,000. That’s less than half the cost of a one-year switch on a full balance, and the payments are spread over many years. You still have to pay taxes on the conversion. You just don’t pay everything at once at the highest rate.
The disadvantage is that payment is earlier. But Ramsey’s point is that rates are likely to be higher in the future, especially after required minimum distributions kick in. Ramsey makes the point that locking in the rate you know today beats waiting for a rate that might be worse.
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RMDs and surviving spouses may make future taxes higher
Lisa is 54 years old. For those who turn 74 after 2032, required minimum distributions generally begin at age 75. At that point, the unconverted $2.8 million IRA will be larger, and the forced withdrawals of the balance each year without the option to skip those balances will generate significant taxable income.
There is also the issue of the surviving spouse. Lisa’s husband is older. If she ends up filing her taxes alone, her scope will be narrowed. In 2026, 37% will start at $640,600 for single filers and $768,700 for married couples. Once she files as a single taxpayer, income currently in the 35% range may slide into the 37% range.
Here’s a different version of the same problem. Under the 10-year rule, most adult children who inherit a traditional IRA must empty it. If this happens and they are in a high-income year, then these withdrawals will be added to their existing income and taxed at their marginal rate.
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Funds inherited from a Roth IRA are tax-free for the same 10-year period. For an account of this size, this gap is significant. Conversions may also increase Medicare premiums and affect Social Security taxes for the same year, so these also need to be considered.
Ramsay noted on the show that he cashed in his pension. He said he initially did it for the tax-free growth and later came to appreciate the estate planning aspect of it.
Before Converting a Large Traditional IRA, Check the Math
Rose conversion is not the right choice in every situation. If your tax rate now is about the same as your tax rate later, time usually won’t change your final outcome. This strategy produces better results when your current rate is lower than the rate you expect to pay in the future.
Before taking action, find out what your current tax bracket is, and cap your annual conversions at that number. Pull the IRS distribution schedule and estimate required minimum distributions starting at age 75. Run the surviving spouse scenario using the single-filer bracket and see how things change.
Pay conversion taxes with funds other than IRAs whenever possible. Using IRA funds to pay bills reduces the amount you actually convert. For amounts withheld from an IRA before age 59 1/2, you may also be subject to an early withdrawal penalty of 10% of the amount withheld.
A CPA or fee-only financial planner can run these numbers on different conversion amounts and timelines. A decision of this scale deserves proper modeling before making a decision.
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