My First Roth Conversion! Who Cares?

I’ve never felt more like a true F.I.R.E. (Financial Independence Retire Early) person as when I made my first Roth conversion. What is that and why do I care?

Let me nerd out on you for a few minutes about retirement accounts. I promise I will make it as interesting as possible, and explain why you should care, too. Spoiler alert – its because you can save money and gain freedom!

First, some boring stuff.

What is a Roth IRA?

A Roth IRA is like a special savings account for retirement where you put in money you’ve already paid taxes on.

This is different from traditional retirement accounts, where you don’t pay taxes on money when you put it in, but you have to pay taxes on all of it when you take it out. That is, you pay income tax on your contributions plus anything it has earned, when you withdraw it.

Whereas a Roth, you don’t have to pay taxes on anything when you withdraw. Both what you put in, because you already paid tax on that, and the money it earned.

But taxes are as unavoidable as death, right?

You may think “pay now, or pay later? what’s the big difference?” Well, there can actually be a huge difference! And besides saving you a little money, proper planning can give you freedom!

And while the tax man cometh, we can strive to be as tax-efficient as possible.

So, you have to make a plan about what will be the most tax advantageous for you. Deciding whether to contribute to” pre” or “post” tax accounts, how much, when – well, there is science and art involved.

Like all personal financial planning, it would be a lot easier if you had a crystal ball, and is ultimately personal.

Roth – The Crown Jewel of Retirement

Why are Roth’s all the rage? Besides possibly looking forward to tax-free earnings in the future, the Roth IRA has some other tax advantages that make it a bit of rockstar in the retirement world.

Let’s walk through how it could not only reduce your tax bill, but possibly allow you to retire early — and everything else it has to offer!

For now, just go with me, and assume you want a Roth IRA with as bloated a balance as you can manage.

How to get that big, fat Roth?

Anyone with earned income can open up a Roth IRA and contribute. However, it can be difficult to build up your Roth, because there are contribution limits. Right now, for most people it’s $6500 a year. You can’t just shove all the money you want in there.

Or can you? (Picture a grinning face with a deviously raised eye-brow.)

That’s where the Roth conversion comes in.

There’s a provision in the tax code that allows for people to take money from a Traditional IRA and move it into a Roth IRA, as long as you pay the taxes on it.

That is, you pay the taxes on it as if you had made that money in that particular tax year you make the conversion.


You’re underwhelmed, I know.

Why is this so cool?

This is only cool if the year you make the conversion you’re in a lower tax bracket than when you originally put it in the Traditional IRA. Like say, when you have no other income for the year!

But how do you have no income in a year and actually live? And how do you have a lot of money in a Traditional IRA to convert, anyway, as it has the same yearly contribution limits?

Who would want to do that and why?

Case Study

Let’s say you’ve been working your butt off to become a super-saver. You’ve been maxing out your 401(k) retirement account at work, which has a much higher limit, over $20,000 a year. You’re also contributing the max to your Roth IRA, and still have some to put in a regular, non-retirement account. (Non-retirement account, meaning there are no tax-advantages and no limitations on using the money.)

You get to a point where you have a good nest egg, but a lot of it is in that 401(k) account. And for those of you that don’t know, you generally can’t touch that money until you’re 60. Not without paying a penalty – currently 10%, plus the taxes on that amount!

But what if you don’t want to die slumped over in your cubicle? Maybe you dream of traveling the world? (Like I did.)

Especially if you see a way you could afford to leave your job, if only you could get at some of that 401(k) money, penalty free, before that traditional retirement age!

Roth Contributions are Fair Game

Well, there’s another nifty little part of the incredibly complicated tax rules that says, you can always take out, without penalty, contributions that you’ve made to your Roth.

You can’t touch the earnings tax free until 60, but the contributions that you already paid taxes on, those are fair game!

Great, you’ve been saving into your Roth and non-retirement accounts. But its not enough to get you to age 60!

Another little part in the rules, is that money you have converted, can be taken out after 5 years, as if it were a contribution.

“5 years!! What good does that do me?” you may be thinking.

The answer is, if you believe you have enough money that you can get to immediately, to live off of for five years – then it can make all the difference! You can retire!

What would that look like?

I’m going to give a broad strokes picture here as a sort of “proof of concept.”

You’re that bad-ass super saver and you’ve determined you have enough to go try retirement. What that number is, exactly, is highly debatable.

But you’ve done your homework, and you think you’re ready.

You believe you have enough money between your Roth and non-retirement savings to live off of for 5 years. But the rest is in your 401(k) where you’ve been avoiding paying taxes on it.

So, you quit your job! (Woooooo, that’s the fun part!)

Then, you roll over that 401(k) into a Traditional IRA. Easy breezy, no taxes involved. They are both treated the same as far as you put tax deferred money into them. Now you have a fat Traditional IRA from which to convert into your Roth.

Here’s the super hard part: You take your best guess at what you’re going to need to live on in 5 years. You’re prepared to pay the tax on that amount. You’ve considered how it might affect financial aid or health insurance subsidies.

Then, the easy part. You log into whatever money platform you use and process the conversion!

Bridging the Gap

Now, you live off your savings and non-retirement accounts until the conversions become available to you. And, you do one for each year between the time you expect your non-retirement funds to run out and when you can fully access your retirement savings.

Basically, you build a little ladder bridge of Roth conversions that spans the gap between when your easily accessible non-retirement money runs out and when you get into that “penalty free” zone of traditional retirement.

So, you’ve successfully used that money to “retire” before the actual retirement age.

Wasn’t there supposed to be amazing tax benefits?

While you wait 5 years for your conversion to mature, you can get a little instant gratification. You can calculate what you would have paid in taxes on that money vs what you did pay in taxes.

And then you get to laugh like a movie villain who just robbed a bank and got away with it!

So, let’s say, when you were the corporate worker bee, your salary fell between $45,000 and $95,000. This put you in the 22% tax bracket. But you saved your money tax deferred.

Then, once you quit your job and are living off non-retirement account money. That money has already been taxed, and let’s say the income and gains on it are minimal. Essentially, you will only have to report what you convert from your Traditional to your Roth IRA as income for the year.

Let’s say you process a conversion for $40,000 that year. Well, $40,000 a year income puts you in the 12% tax bracket.

So, you pay 12% on what you would have paid 22% in tax, if you had not saved it when you did. You save 10% on your tax bill!

You legally cheated the tax man.

Don’t you feel practically immortal now?!

Of course, because tax brackets are progressive, meaning you pay lower amounts on money you earn up to a certain amount, and then it increases, moving up the brackets – its not as straightforward as this example.

But generally, if you’re living simply off way less than you used to earn, you’re pretty much guaranteed to pay less in tax on money you convert than if you paid the taxes in the year you earned it.

Who doesn’t love saving on their taxes?

But, Am I really supposed to know what I’m doing in 5 years?

Truth is, the future is never guaranteed.

Maybe you won’t be alive in 5 years, or maybe you will have found a fabulous new career and be back at work earning big bucks. Maybe, Fight Club style, the entire financial system will blow up in a spectacular display leaving us morons who participated in it regretting our foolishness.

Most assuredly you’re not going to completely accurately guess what your cost of living will be in 5 years. But are you sure your job you hate is going to be there for you in 5 years?

Life is risk! All you can do is your best to manage it.

Using a Roth IRA can be a powerful tool in managing risk and providing you opportunities in the future that you can’t even imagine today.

Roth Conversions Aren’t Just for Early Retirement

Maybe early retirement isn’t in the cards for you. The big, fat Roth account is still highly useful to all and its still worth considering building it up through Roth conversions. Even if you don’t get that ‘cheating the tax man’ moment.

Picture yourself in the future. Maybe you retired early, did a few substantial conversions then went back to work for a while. Now working again, you continue to contribute to a Roth. You also look at your income and tax brackets each year, and convert a little extra into your Roth here and there.

You’re in your 60’s now, and you want to buy a house in Mexico. Lucky for you, you have a good amount in your Roth IRA that you can take any amount, without any taxes incurred. For example, you have $200,000, take it all out and you owe Uncle Sam nothing.

If this money had been in your Traditional IRA, you would have to pay somewhere around 30% of that in taxes under today’s rules. Ouch, that would hurt.

Instead, you feel awesome about contributing and converting money into the Roth at much lower rates. Maybe that house in Mexico can include a pool, thanks to the savings!

Other Rockstar Qualities of the Roth

One other super-power of the Roth IRA vs traditional retirement accounts is that there are no “minimum required distributions.” Basically, at the age of 72, you are required to start taking a certain amount of money out of your traditional retirement accounts, whether you want to or not.

The amount is a percentage based on how long you’re “supposed” to live. Depending on the balance of your account, it can be quite substantial, leaving you with large tax bills, whether or not you spend the money.

Uncle Sam wants to start getting paid!

So, let’s say you’re in your 80’s now, and live a simple life. You were always frugal, and saved all you could into traditional retirement accounts. You don’t travel much anymore, your house is paid off, and your main hobby is playing backgammon with your friends on the same board you got as a retirement gift at 60.

Your investments have done well over time, and you have quite a substantial nest egg.

You live off just your social security. But, because of the required minimum distribution rules, you’re forced to withdrawal a hefty amount every year from your retirement account. Those withdraws generate a hefty tax bill.

Perhaps taxes in the US have risen a lot, since you deferred them by saving in your 401(k) 40 years ago! Maybe you’re paying something like 40% now. Who knows, maybe taxes will be lower in the future, but do you want to bet on it?

You’re healthy now, but you worry you will need expensive care someday. Say you do end up having a large end of life expense, and it gets taxed at an even higher rate than your required minimum distributions! You see more and more of your safety net going to taxes.

Imagine you die peacefully in your bed, without ever needing to drain your life’s saving. You would want to see it go to family or a beloved charity, right?

Roth IRA’s tax benefits continue past your death! Heirs inherit the account tax-free. Of course, there are some rules about, but its generally much more favorable to inherit Roth money.

Instead of seeing your nest egg eaten away by taxes, you could have made some strategic Roth conversions along the way. Years when you happen to have particularly low income for some reason, or the government did do some tax bracket changes – had you taken advantage of them at the time, things could be a lot different.


Congratulations if you made it this far! Hopefully, this made some sense and didn’t bore you to death. Of course, there are a TON more nuances! I’ve rounded up on some numbers and ages. I lopped-off a bunch of the minutia in the rules, to make things accessible. I didn’t even mention Roth 401(k)s and there’s a bunch of other types of tax accounts to consider in your planning.

But hopefully, you get the point that Roth IRA’s can provide tons of tax benefits and freedoms if you work them right.

Even if you don’t use them to live the perfect early retirement!

What My Conversion Means to Me

So, why am I so happy about doing my first Roth conversion as an early retiree? Of course, the immediate reward for all the years of hard work, living below my means, deferring gratification and planning, was getting to leave my job and pursue full-time travel.

But getting to do my first substantial Roth conversion actually does feel like a secondary reward!

I am one of those that got to move down tax brackets, and do take some pleasure in having saved a bit in taxes. Maybe some think I’m just taking advantage of a dirty tax loophole. But it exists, it’s legal, so I’m going to use it. And I’m trying to tell you, so you can too!

Also, I’m optimistic that it will pay off in the future, providing me more freedom one day. My plans have worked okay so far – better than if I had done nothing, for sure.

10 years or so ago, when I started to pursue F.I.R.E., I couldn’t imagine the exact details of my life today. It most certainly does not look like I thought it would! But guaranteed, my life is better because I learned about and improved my personal finances.

Even if I have to go back to work because I grossly miscalculated things. Maybe this year, maybe in 5 years. I don’t think I will have regretted this time.

The fact is, I’m enjoying today. I made my Roth conversion sitting in my apartment in beautiful La Paz, Mexico. It took about 5 minutes. Then I went out for a walk along the ocean and a beer with the love of my life. Not a bad day’s work!

Pursuing financial independence is actually about determining what is truly valuable. What is worth your money, time, or attention. 

And truth is, there’s nothing that I would spend one more dollar on today that would make me any happier. I might as well spend it buying freedom in the future, if it should come.

Are you ready to show your Roth some love?

Do you have a Roth IRA? How do you see it playing a roll in your financial future? Mine took me to a beach in Mexico, where do you see yours taking you? Tell me, I’d love to hear about it!

Master Your Money, Live a Truly Prosperous Life!

Want to live a truly prosperous life? Don’t waste time. I can help!

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