Optimal decisions under price dynamics for Roth conversions

Abstract

Retirees are faced with a variety of choices during their working and retirement years on how to best support their retirement lifestyle and estate planning goals. One of these choices is the option to convert a portion of their pretax savings from a tax-deferred account (TDA) into a tax-exempt Roth account. In this article, we quantify the Roth conversion payoff and when/how it depends on investment returns. We show that, while the use of taxable account assets may produce a larger payoff than early withdrawals from the Roth IRA, large unrealized taxable account gains and estate plans may change this calculus. Our work provides a recommendation on how current dividends or cash versus appreciated assets should be used to optimize Roth conversion payoffs, and informs FinTech companies and robo-advisors on how to best support this important option for millions of current and future retirees.