The Roth IRA offers tax-free investment growth and tax-free withdrawals during retirement. For many investors, these features make the Roth come out ahead in the ongoing traditional-versus-Roth IRA debate. Even so—and thanks mainly to a combination of legacy assets and the larger sums rolled over from employer-sponsored retirement accounts—the lion’s share of all IRA assets are held within traditional accounts.1
“Despite the advantages of conversion, there isn’t always a clear-cut path when deciding whether to convert a traditional to a Roth IRA,” says Vanguard’s Joel Dickson, global head of advice methodology. “The traditional wisdom says to convert if you expect your tax rate to rise in retirement. And yet, a Roth conversion can be favorable for far more investors than this rule of thumb would suggest.”
Dickson and Vanguard wealth planning specialist Boris Wong champion the break-even tax rate (BETR) as a superior method for calculating the point at which a Roth conversion makes sense.