My Mega Roth Conversion: a $162,000 mistake?

Prior to 2010, Roth conversions were off limits to most physicians or anyone else with six-figure income. In 2010, the rules changed and the $100,000 AGI limit was eliminated.

The prevailing thought was that there would be a one-year window in which high earners could legally do a Roth conversion. From one of the many articles on the subject from back then:


“2010 is the only year that this exception is allowed. Starting in 2011 (unless congress changes it), it reverts back to the original way where all the tax is owed in that year.”


Guess what? Our federal government liked the tax revenue from all the 2010 conversions so much that the AGI limit was lifted permanently (for conversions only).Fox & Company CPA

Of course, I didn’t know that was going to happen. I will also admit to being a personal finance novice at the time. I knew that Roth money was good money and I wanted more Roth money. So I filled out some paperwork and converted our traditional IRAs and my SEP IRA. I wasn’t going to let that one year window pass me by!

Let’s talk numbers. My wife and I had traditional IRAs worth a combined $36,000 ($30,000 of which was tax deferred, with $6,000 in non-deductible contributions). The SEP IRA, after 5 years of tax-deferred contributions of $25,000, $45,000, $45,000, $49,000, and $49,000 had grown to $242,000.

To convert the whole lot to Roth, I had to pay income taxes on $272,000. There was a provision (which no longer exists) to spread the tax pain over the following 2 tax years, so we took advantage of those interest-free loans. The conversion was made in 2010, but the taxes were paid in 2012 (2011 return) and 2013 (2012 return).

In 2012, with the addition of $136,000 of “income” from half of the conversion, we paid an extra $53,557 in federal and state income tax. If we had instead invested that $53,557 in an S&P 500 fund in a taxable account, we would have seen a 62.5% return from April 15, 2011 to today according to the S&P 500 Dividends Reinvested Price Calculator. That money with four years of 12.9% annualized returns would be worth $87,000 (assuming a 0.5% tax & expense drag).

In 2013, we similarly added $136,000 to our taxable income on the 1040. The $53,577 we paid in 2013 would have grown 40.5% in three years, a 12% annualized return. Assuming the same 0.5% drag on the taxable account, we would have $75,000 if we hadn’t paid that portion of the tax. Thank you, bull market!


In summary, our calculated net worth would be $87,000 + $75,000 = $162,000 higher today if I hadn’t made the Roth conversion in 2010.


big chainsaw bear

i don’t often enjoy bear markets, but when i do…


Have I made a huge mistake?

This is not a simple question to answer. Yes, our net worth would be a larger number if I hadn’t made the conversion. But now I’ve got a lot more of that good Roth money that will (presumably) never be taxed again. More than five years have passed, which means I can withdraw the entire $278,000 penalty-free and tax-free. Not that I would, but I could.

What would it cost to convert today?

In the 6 years since making the conversion, the S&P 500 is up 95.7%. The $272,000 has grown to $532,000 (not precisely, because my Roth holds different asset classes including REIT and emerging markets). Let’s call it $500,000 today. If it were still in the tax deferred IRAs, to convert it all, I’d be paying the tax bill in one year rather than two. Converting $500,000 at once with a high income in a high tax state would create a tax bill of about $250,000. Ouch!

Is there a better way to make Roth Conversions?

Yes! Wait until you’re early retired. You can convert smaller chunks one year at a time, when you are in lower income brackets. A good strategy is to fill the 15% bracket, and perhaps the 25% bracket with Roth conversions. Play around with tax software and see what works in your situation. If you convert too much, you can recharacterize a portion of the conversion back to traditional before filing your taxes the following year.

Making annual conversions to Roth will build a so-called Roth ladder, which is a great strategy to access your 401(k) / IRA money prior to age 59.5. Converted assets can be accessed tax and penalty-free after it has seasoned in the Roth for 5 years (technically January 1st of the year 5 years later, so closer to four years if you convert late in the year).

gob and his huge mistakes

So, did I make a huge mistake?

We make the best decisions we can with the knowledge we have at the moment. When I was 35, the thought of an early retirement hadn’t crossed my mind. I thought 2010 would be my only opportunity to get my hands on more Roth money, before going back to many years of adding $50,000 a year in tax deferred retirement savings.

Knowing what I know now, having my eye on an early retirement, if I could fire up the flux capacitor and go back in time, I would advise my younger self not to make those conversions. “There will be time to make those conversions in a lower tax bracket when you’re early retired”, I would say. While in hindsight, it was probably not the best decision, I did the best I could with the information I had at the time.


back to the future delorean

doc, could i borrow your ride?


The good news is I’ve since become an employee, and have been building up some tax deferred retirement savings. The 457(b) will be used to help fund our monthly expenses in early retirement. The 401(k) will be rolled over to a traditional IRA, and year by year, slowly converted to Roth. I’ll still be able to take advantage of those Roth conversions in much lower tax brackets down the line. Unless the rules change. Again.

Did you take advantage of the “one-time opportunity” in 2010? What would you have done in my situation? Would you say I made a huge mistake?

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  • Anonymous

    You made the right choice…bill at that tax bill at that time would have given me an AMI! I pondered this question with a traditional IRA I have from an old 403b. That’s great advice to wait. Your info is awesome, Thank you,

    • I’m glad you think it was the right choice. I think it was at least a reasonable choice, and not necessarily a huge mistake. I did when the Pease provision had been phased out, and before the ACA taxes kicked in. Taxes were high, but they would be even higher today. Of course, as I’ve said, they will be lower in early retirement. Thanks for your thoughts!

  • The Green Swan

    I would have only been about 24 at that time so no, I didn’t take advantage of it but I specifically remember my Dad doing so. At the time nobody would have risked not taking advantage of the conversion. You didn’t make a bad choice, hindsight is 20/20 and it’s just one of those things out of your control. Thanks for the post PoF!

    The Green Swan

    • Thank you, Green Swan. As you say, hindsight is 20/20, which is why I don’t beat myself up over this or for not buying Apple or Microsoft when they were just getting started (or any individual stock since I don’t own any). It’s easy to pick the winners and make the right call when looking backwards. Looking forward, it’s not that easy, unless you’re Biff with Marty McFly’s Sports Almanac.


  • I think the key to your post is when you said:

    “We make the best decisions we can with the knowledge we have at the moment.”

    That’s all we can do. The good news is that your money will now be tax free when you take it out, so that will be one less thing to have to even think about down the line.

    — Jim

  • Sergey

    Without doing the conversion of trad. IRA, backdoor Roth IRA would be out of the question- or else would be taxed on the converted amts. Also, from what I remember, 2010 was not a particularly onerous year for taxes(certainly there was not added Obamacare tax)

    • True and true. The Pease provision wasn’t in effect in 2010, nor was the ACA tax, plus I lived in a lower tax state than I do now.

      I was able to circumvent the pro-rata rule when I became an employed physician by rolling several years worth of post-2010 SEP-IRA money into my employer’s 401(k). So I’m once again eligible to do the Backdoor Roth.

      Thanks for the input, Sergey!

  • Yeah, I did this too, although with smaller numbers. Taxes the next two years were painful indeed! Knowing my plans now I think it was probably a mistake but hindsight is always 20/20 😉

  • gxa

    I did the same as you did, with about the same amount. My post conversion funds have grown as yours have, and I have also built up a significant amount in a new 401k since then, so will be able to take advantage of maxing out the lower tax rates with future conversions.
    Converting when the Dow was down has allowed all of that to grow without having to be taxed again. And adding that income without the Pease provision was important for us as we had a big property tax bill that year (long story). The other huge benefit is the lack of RMD on the Roth accounts.
    Still happy I did it.

    • Glad it worked out for you. I should have plenty of tax deferred dollars built up again by the time I retire, even if that is as soon as 5 years from now at age 45.

      I’m not entirely convinced it was the right thing for me to do, but most opinions are that it was, and I’ve not harboring any regrets.


  • I contemplated the same for my IRA but decided not to. We pay about 45% in combined marginal taxes today and plan to pay only 15% federal and no state taxes in retirement due to move to zero-income state once we retire. We invested the money we would have spent on the tax bill in equities and that amount has grown to an amount multiple times over what we will pay in taxes once we take RMD.
    I am also worried about politicians finding a way to tax Roths in the future. You never know.

    • Indeed. Every year, there are rumors and proposals for changes to Roth accounts that never get off the ground.

      I don’t fault you for making the informed choice that you did. I might choose differently if I had a flux capacitor.


      • Of course there’s also the risk that marginal taxes go through the roof and nothing is changed with the Roth so everybody who did the conversion is looking golden. Who knows?
        Definitely what helps you is that you got an interest free loan to pay the taxes due with a delay and the market did pretty well during that time. So doing the conversion back then and having the peace of mind of no taxes might have been worth it.

        Nice blog! Found you through Mr and Mrs Pie’s blog!

  • Slightly off topic, but maybe of interest to you and some readers: What to do if you like to contribute more to a Roth out of your taxable account wealth but you can’t because you max out the $5,500 ($11,000 for married) every year already? Create a synthetic Roth in a taxable account:

  • PoF asked me to post a recent email I sent to him on this blog post:

    >>I believe you made an incredibly good decision, not the (possibly) huge mistake you wrote about.

    Here’s what I see:
    • You paid $107,114 in taxes on the conversion. Your Roth IRA (at time of post) was up 91%. The net effect was that the government allowed you to “convert” $107,114 from a taxable account to a Roth account.
    • Given that, you “invested” $278,000 + $107,114 = $387,114. Your balance at time of writing was $532,000, or up 37% (actually higher because the tax payments were made 2 & 3 years later).
    • In addition, all of the growth on the tax payments that w/h/b taxable gain is tax free and you would owe taxes on all gains in the taxable account. All growth is now utterly tax free.
    • Of course, that’s assuming you had actually invested the money in your taxable account rather than doing something else with it (as most people would have done), including letting it sit there.
    • Sure your heirs would have gotten a stepped-up basis at your death if you had left the account to grow, but you’ve permanently stepped up your basis with the conversion.

    How could that be a mistake? I think there is no question that you made the correct decision. There is also no question, in my mind, that the stars aligned for all equity investors who converted to Roth IRAs in 2010, right after the bear market of 2008-2009. I can tell you that we have some very happy clients!

    Must heartily disagree with your recommendation under “Is there a better way to make Roth Conversions?” No better time to convert than during a bear market, no matter your age.<<

    Thanks for asking me to post this – here's to creative planning!

    • PhysicianOnFIRE

      Thank you for the in-depth analysis, Johanna.

      That’s the best part about airing my soiled laundry on the internet; I get great feedback like this. It’s looking more and more like I made a good call with the Mega Roth conversion.


  • chau

    should my husband do the roth ira backdoor since he doesn’t have an existing IRA but I do? And avoid the mega roth conversion?

  • Kevin Pritchard

    Thanks for a great article! My wife and I are entertaining the thought of a similar move and wanted to get your thoughts on it.

    My wife recently retired so she could spend more time with our young children. She has a traditional 401k of about $250000. We are leaning towards just leaving it with the current company MassMutual. There is an annual asset charge of 0.15%. The money is divided amongst various Vanguard funds so the expense ratios are fairly minimal (0.04% – 0.08%)

    The vast majority of our net worth is in taxable accounts through Vanguard. We both also have backdoor Roth IRAs at Vanguard. We were contemplating a Mega Roth conversion like you did as an alternative to keeping the money at Mass Mutual.

    Reasons we are leaning towards NOT doing the Roth conversion:
    1) My income still puts us in the highest tax bracket
    2) I don’t plan on retiring early, I enjoy my job and hope to work into my 60s (and if I’m healthy and happy enough), perhaps into my 70s

    Would you also recommend foregoing the conversion? Thanks!

    • The only reason to convert to Roth when you’re currently in the highest tax bracket is if you think you’ll be in an even higher tax bracket when you are forced to take RMDs. If the vast majority of your net worth is in taxable, I doubt your RMDs will put you in the same tax bracket, and a higher one doesn’t exist, at least not yet. I don’t know your entire financial picture, but based on what you’ve told me, I’d be comfortable leaving the money in the low-fee 401(k) for now.


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  • I don’t consider this a mistake, PoF. You made a calculated decision which you now are concerned might not generate the absolute maximum value. Stop it!

    That is as crazy as trying to time a market top! The tax law changed; it will change again. Back then I recommended clients bifurcate their choice because insiders strongly suspected this might become permanent. No matter what happened I was half right, but only half right. (Is 50% a passing grade now?)

    I don’t like paying tax up front, but the younger you are (the longer the money stays invested) the more time the tax free growth will mitigate the effects of the up front tax bill.

    Also, you mentioned the easier access to the money now. Hard to put a value on this, but it is valuable if the need for funds ever arises.

    I like what you did here, PoF. You made your readers think about a serious tax issue. A lot of money is/was involved and you made a decision. Every reader you have should learn from your lesson.

    Back to your regular programming.

    • Thank you for taking the Twitter-bait and weighing in, Keith!

      It seemed like the right choice at the time, and has left me in an enviable position with a large Roth stash that has more than doubled in the interim. It’s tough to complain about that, but with the benefit of hindsight, OK, OK… I’ll stop now.

      I like how you approached it. I often suggest a similar strategy for windfall recipients wondering if they should lump sum invest or dollar cost average their pile of cash. It’s such a common question on forums and I like to point out that it’s not a binary question. You can do both — invest half now and DCA the rest over 6 to 12 months. Hedging that bet gives you a hybrid between the two potential outcomes. Just like your recommendation. Great minds…


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