Pay the Tax Now or Leave It to Your Kids: Should You Convert Your Traditional 401(k) or IRA to a Roth?

You've spent 30 years stuffing money into your Traditional 401(k) and IRA. The statement says $1.5 million. Congratulations — but here's the uncomfortable truth we share with clients all the time:

That's not all your money. The IRS owns a slice of it, and they get to decide when you pay.

Every dollar in a Traditional account comes out as taxable income eventually — to you, to your spouse, or to your kids. A Roth conversion is how you buy that slice back from the IRS on your terms, at today's rates, instead of letting the government pick the timing.

Here's how it works, when it makes sense, and the simple math behind it.

What a Roth conversion actually is

You move money from your Traditional IRA or 401(k) into a Roth IRA. The pre-tax portion of what you move gets added to your taxable income this year — so yes, you write a bigger check to the IRS in April. (If you've ever made after-tax contributions tracked on Form 8606, that piece comes over tax-free, calculated pro-rata across all your IRAs — one more reason to run the numbers with us first.)

In exchange, that money now grows tax-free forever. No tax when you pull it out. No required withdrawals while you're alive. No tax bill for your kids when they inherit it — as long as the Roth has been open at least five years.

You're not avoiding the tax. You're choosing to pay it now, at a rate you know, instead of later, at a rate you don't.

Why we keep telling clients with big Traditional balances to consider it

1. The IRS forces you to take the money out — whether you need it or not. Starting at age 73 (or as late as 75, depending on your birth year), you must take Required Minimum Distributions from Traditional accounts and pay tax on every dollar. Even if you don't need the money. Even if it pushes you into a higher bracket. Roth IRAs have no RMDs during your lifetime (and since 2024, neither do Roth 401(k)s).

2. Your kids will pay tax on it — probably at their highest-ever rates. Under current law, when your children inherit your Traditional IRA, they must drain the entire account within 10 years of your death — and if you had already started RMDs, they must take taxable withdrawals every single year along the way. Think about when that happens: your kids are likely in their peak earning years. Your $1.5 million IRA gets stacked on top of their salaries and taxed at their top bracket. An inherited Roth still has to come out within 10 years — but every dollar comes out tax-free.

3. The widow's penalty is real. When one spouse passes away, the survivor keeps roughly the same income (the RMDs don't stop) but starts filing as Single. In 2026, a married couple doesn't hit the 22% bracket until $100,800 of taxable income. A single filer hits it at $50,400 — half. Same money, higher tax, smaller standard deduction. Converting while you're both alive means paying at the friendlier married rates.

4. Big RMDs trigger Medicare surcharges. Medicare premiums aren't flat — higher income means higher premiums (called IRMAA). In 2026, a married couple crossing $218,000 of income pays roughly $2,300 more per year in premiums, and the surcharges climb from there. Large RMDs in your 70s and 80s can lock you into those surcharges for the rest of your life.

5. Roth money is guilt-free money. This one's not in the tax code, but our clients feel it. Pull $60,000 from a Roth to pay cash for a car and it costs you... $60,000. Pull it from a Traditional IRA and you just created a taxable event — at a 28% combined rate (more on that below), roughly $83,000 of withdrawals to net $60,000 after tax. People genuinely enjoy spending Roth money more. That freedom is worth something.

6. The only way your Traditional money escapes tax entirely is charity. If your plan is to leave your IRA to charity, don't convert — the charity pays no tax anyway. But if the money is going to people, someone is paying the tax. The only question is who, and at what rate.

The three-question test

A conversion is a clear winner over your lifetime when all three of these are true:

1. Your tax rate today is the same or lower than the rate the money will face later — and "later" includes the bracket of whoever inherits it and is forced to drain it in 10 years.

2. The money will keep growing after you convert. Time is the engine here.

3. You can pay the conversion tax from money outside the IRA — a savings or brokerage account, not the IRA itself.

That third one is the piece people miss, so let's talk about the math.

The math, without a black-box calculator

Here's a Hamilton County example. Say you're a married couple in Carmel with a $1.5 million Traditional IRA, and you convert $100,000 this year.

You're in the 24% federal bracket. Add Indiana's 2.95% state tax and Hamilton County's 1.10% local tax, and your combined rate is about 28%. So, the conversion costs you $28,000 in tax, which you pay from your brokerage account — meaning the full $100,000 lands in the Roth.

"Wait — if my tax rate is the same now and later, isn't it a wash?"

That's what most people assume, and it's wrong. Here's why.

If you don't convert, that $28,000 stays in your brokerage account — where it gets taxed every year on its dividends, interest, and gains. That annual tax drag quietly eats about 1% of its growth, year after year.

If you do convert, that $28,000 effectively gets absorbed into the Roth, where it compounds with zero tax drag, forever.

So even at identical tax rates now and later, converting $100,000 puts your family ahead by roughly:

Years of growth	Extra family wealth from converting $100K
10 years	~$4,700
20 years	~$17,000
30 years	~$46,000

(Assumes 6.5% growth, tax paid from outside funds, and about 1% annual tax drag on the brokerage account. Your numbers will vary — that's what the planning meeting is for.)

And that's the worst case — equal rates. If your future rate is higher (hello, widow's penalty and your kids' brackets), the win gets much bigger.

Rules of thumb: what if my rate is different later?

Here's the quick-reference grid we use, per $100,000 converted:

(Illustration only. Same assumptions as above: 28% combined rate today, 6.5% growth, tax paid from outside funds, ~1% annual tax drag on the brokerage account. Results are sensitive to those assumptions — and they flip if you pay the tax from inside the IRA. Your actual numbers depend on your situation.)

Three takeaways:

1. If your future rate is equal or higher, converting wins at every horizon. For most clients with seven-figure Traditional balances, this is the situation — RMDs, the widow's penalty, and the kids' brackets all push future rates up.

2. Even if your rate will be somewhat lower later, converting still wins if you have time. A 3-point rate disadvantage breaks even around 10 years. Even a 5-point disadvantage turns positive around 20.

3. The younger the money, the stronger the case. Money you won't touch for 25+ years is the best conversion candidate you own.

The traps (read this part twice)

A conversion done carelessly can hurt. Watch for these:

• Don't pay the tax from the IRA itself. If you convert $100,000 but send $28,000 of it to the IRS, most of the benefit evaporates — and if you're under 59½, that $28,000 gets hit with a 10% penalty too.

• The Medicare lookback. Your 2026 income sets your 2028 Medicare premiums. Converting at 63 or later can raise your premiums two years down the road — and a Roth conversion is not an event you can appeal. The sweet spot for many clients is the window between retirement and Medicare.

• The ACA subsidy cliff. If you're retired before 65 and buying health insurance on the marketplace, one dollar of conversion income over the limit can wipe out your entire premium subsidy — thousands of dollars gone. (As of August 2026, the enhanced subsidies have expired and the hard income cliff is back; Congress is debating an extension, so we check the current rules before every conversion.) If this is you, we model it to the dollar before converting anything.

• The estimated-tax surprise. A big conversion means a big April tax bill — and if you haven't paid enough in during the year, the IRS adds an underpayment penalty on top. There's a safe harbor (pay in 100% of last year's tax, or 110% if last year's income was over $150,000), and we make sure clients land inside it.

• Under 59½? Mind the 5-year clock. Each conversion starts its own 5-year timer. Pull converted money back out within 5 years while you're under 59½ and you'll owe a 10% penalty on it.

• Conversion income raises your other taxes too. A conversion can make more of your Social Security taxable in that year, and by raising your income it can expose your dividends and capital gains to the 3.8% net investment income tax. Neither kills the strategy — but they belong in the math.

• Conversions can't be undone. Once you convert, it's permanent. That's one reason we usually convert in annual slices — filling up a bracket each year — rather than all at once.

• Planning to move to Florida or Tennessee? Converting in Indiana means paying Indiana's roughly 4% (state + county) now. If you'll soon be a resident of a no-income-tax state, waiting may save that entire slice.

• Leaving it to charity? Don't convert those dollars. Charities pay no income tax on inherited IRAs, and once you're 70½ you can give up to $111,000 a year directly from your IRA tax-free.

The Indiana angle

A few things that make this cleaner for Hoosiers:

• Indiana taxes the conversion at a flat rate (2.95% for 2026, plus your county rate — 1.10% in Hamilton County). No state brackets to game, but no nasty surprises either.

• Indiana gives no break on Traditional IRA and 401(k) withdrawals — every RMD dollar gets the full state and county tax, forever. Qualified Roth withdrawals? Indiana taxes them at exactly zero.

The bottom line

If you have a large Traditional 401(k) or IRA, the tax on it is coming — for you at RMD age, for your spouse at single rates, or for your kids in their peak earning years. A Roth conversion lets you pick the year, pick the bracket, and pay it once at married-filing-jointly rates while you still can.

Your future self — and your kids — will thank you.

Wondering how much you should convert this year without tripping a bracket, a Medicare surcharge, or a subsidy cliff? That's a 30-minute conversation with real numbers. Contact Schaaf CPA Group and we'll help map out your conversion window.

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This article is for general information and isn't tax advice for your specific situation. Schaaf CPA Group can help you evaluate whether this strategy fits your circumstances.