Here’s why most US retirees with less than $2,000,000 should avoid Roth conversions. Are the odds against you, too?

However, these calculations only tell part of the story. Roth conversions are not just a tax strategy — they’re also a bet on longevity, market performance, and long-term tax rates. In other words, the strategy works best if you’re in a low tax bracket today, higher tax bracket later and live long enough to recoup the upfront taxes.

For many people, especially those retiring later with less than $2 million in savings, the odds of a net benefit are lower. Here’s a closer look at the risks of converting to a Roth.

Retirement length

If you pay taxes upfront to convert assets from a 401(k) or traditional IRA to a Roth account, the assets must grow enough to offset the taxes paid.

For example, if you convert $100,000 and pay $20,000 in taxes, it may take several years before the remaining $80,000 grows past $100,000 to recoup the tax cost.

In general, the lower the upfront tax and the longer the investment horizon, the greater the potential payoff, according to a study published by the Financial Planning Association. (1)

Many financial advisors and online calculators assume a 30-year retirement, giving ample time for the conversion strategy to pay off.

But actual retirement lengths are often shorter. If you retire at age 62, your life expectancy may be about 19.6 years; if you retire at 67, it may be just over 16 years, according to the Social Security Administration’s actuarial tables. (2)

Depending on the taxes paid to convert, this may not leave enough time for a substantial payoff.

Tax trade off

The core assumption of a Roth conversion is that you’re paying taxes now to avoid taxes in retirement. But if your current tax bracket is high, the trade-off may not be beneficial.

Consider a high-income corporate executive in the 32% marginal tax bracket. Any Roth conversions would be taxed at this rate. Yet, she expects her retirement earnings to come mostly from capital gains, resulting in an effective retirement tax rate of 15%–18%.

Paying 32% today to avoid up to 18% later is generally a poor trade-off. Few retirees face a top-bracket tax rate on every dollar withdrawn, but high earners often do during their working years.

Given average life expectancy and the likelihood of lower retirement tax rates, Roth conversions may not suit many current savers. However, those with substantial pre-tax assets — perhaps over $2 million — might benefit more from the strategy.

Why millionaires should consider Roth conversions

Roth conversions may be more attractive for investors with more than $2 million in pre-tax retirement accounts.