If you’re nearing retirement with a large traditional IRA, you may wonder: should you convert it all at once to a Roth IRA, or spread it out over several years? The Wall Street Journal recently highlighted research suggesting lump-sum conversions generally outperform gradual conversions. While academically sound, the study overlooks several real-world factors that can dramatically affect after-tax wealth. Here’s a closer look.
What WSJ Reported
The WSJ article summarized research modeling Roth IRA conversions with these assumptions:
- Starting balance: $1,000,000 traditional IRA
- Conversion options: lump-sum vs equal 10-year installments
- Investment assumptions: 6% annual growth, 15% volatility
- Tax assumptions: flat marginal rates of 10%, 20%, or 30% (federal only)
- IRMAA and Social Security effects: not fully modeled for gradual conversions
- Finding: lump-sum conversion yielded the highest final balance in their simulations (~$110,000 more than staying in a traditional IRA and taking RMDs)
These assumptions are reasonable for an academic model—but they omit several real-world factors that directly affect after-tax wealth, especially for retirees managing IRAs, Social Security, and Medicare.
What the WSJ Study Missed
- Progressive tax brackets
A $1,000,000 lump-sum conversion spans multiple tax brackets, pushing a large portion of income into higher marginal rates in a single year. Gradual conversions allow retirees to intentionally fill lower brackets year after year. - Opportunity cost of upfront taxes
Paying hundreds of thousands of dollars to the IRS in year one permanently removes capital that could otherwise remain invested. That opportunity cost compounds over time. - Liquidity constraints
Many retirees do not have $200,000–$400,000 of idle cash available to pay conversion taxes upfront. Gradual conversions better align with realistic cash-flow constraints. - Continued growth of the traditional IRA
Gradual conversions leave part of the traditional IRA invested longer, allowing continued tax-deferred growth — an effect often ignored in simplified comparisons. - The “tax fund” effect
In a gradual strategy, money that would have been sent immediately to the IRS in a lump-sum conversion can remain invested (or at least retained) and drawn down over time to pay taxes. Even when partially withdrawn, this capital can still contribute meaningfully to total wealth.
Assumptions Used in This Analysis
To isolate the effect of conversion timing and tax cash management, the following assumptions are used:
Taxpayer Profile
- Filing status: Single
- Other income: None
- Starting traditional IRA balance: $1,000,000
Conversion Strategies
- Lump-sum conversion: Entire $1,000,000 converted in Year 1
- Gradual conversion: $100,000 converted annually for 10 years
Investment Assumptions
- IRA and Roth growth rate: 6% annually (deterministic; no volatility modeled)
- Federal taxes only: No state income tax included
Tax Treatment
- Conversion taxes: Paid from funds outside the IRA (never from the IRA itself)
- Effective tax rate on remaining traditional IRA withdrawals: 24%
This represents a blended long-term effective rate, not a single-year marginal bracket, applied to the remaining traditional IRA balance at the end of 10 years.
Tax Fund Assumptions
- Initial tax fund set aside: $312,000
- Three tax-payment treatments are modeled:
- Lump-Sum Conversion: Taxes paid immediately in Year 1; entire tax fund consumed upfront; final tax fund balance: $0
- Gradual Conversion — Taxes Paid from Idle Cash: $15,000 withdrawn annually to pay conversion taxes; cash earns 0% return; final tax fund balance after 10 years: $162,000
- Gradual Conversion — Invested Tax Fund: Same $15,000 annual tax withdrawals; remaining balance invested at 6% annually; final tax fund balance after 10 years: $349,170
- Capital-gains taxes on the invested tax fund are not modeled, which slightly favors the gradual strategy. The lump-sum conversion, however, incurs a one-year IRMAA surcharge that the gradual strategy avoids. These simplifications are intentional and do not change the central conclusion.
Medicare (IRMAA)
- Lump-sum conversion: One year of higher Medicare premiums due to elevated MAGI
- Gradual conversion: No IRMAA impact, as annual MAGI remains below the first IRMAA threshold
Exclusions (Intentional Simplifications)
This model intentionally excludes:
- Investment volatility
- Required Minimum Distributions (RMDs)
- Social Security taxation
- State income taxes
These exclusions are deliberate and serve to focus the analysis on first-order effects: conversion timing, tax bracket exposure, and the opportunity cost of paying taxes upfront.
Results After 10 Years
| Strategy | Roth IRA Value | Traditional IRA (After-Tax) | Final Tax Fund | IRMAA Cost | Total After-Tax Wealth |
|---|---|---|---|---|---|
| Lump-Sum Conversion | $1,790,848 | $0 | $0 | ≈ $6,114 in additional Medicare premiums | $1,790,848 |
| Gradual (Taxes Paid from Idle Cash) | $1,397,164 | $299,199 | $162,000 | $0 | $1,858,363 |
| Gradual + Invested Tax Fund | $1,397,164 | $299,199 | $349,170 | $0 | $2,045,534 |
Under these assumptions, the gradual conversion plus an invested tax fund produces about $254,686 more after-tax wealth than the lump-sum approach after 10 years.
Important Clarification on the Tax Fund
For the Gradual + Invested Tax Fund case, the tax fund does not compound as an untouched lump sum. It is drawn down annually to pay conversion taxes, while the remaining balance continues to grow at 6%.
Despite these withdrawals, the fund grows from $312,000 to approximately $349,000 over 10 years.
In other words, instead of sending all tax dollars to the IRS on day one, you allow that capital to work for you for several years.
Key Insights
- Lump-sum conversions maximize Roth growth, but require significant upfront cash and trigger higher tax and Medicare costs.
- Gradual conversions smooth taxes, preserve flexibility, and avoid income spikes.
- Gradual conversion combined with an invested tax fund can outperform lump-sum conversion, even under conservative assumptions and without assuming heroic investment returns.
- The WSJ conclusion is valid only under its narrow assumptions—it is not universally optimal.
- This analysis provides a clear counterexample where lump-sum conversion is not the best strategy.
Practical Takeaway
Roth conversions are not one-size-fits-all. The optimal strategy depends on:
- Your marginal tax brackets
- Your ability to fund taxes from outside assets
- How efficiently you deploy capital that would otherwise go to the IRS
- Income-based cliffs such as Medicare IRMAA
If you can avoid spiking your income, avoid IRMAA, and let tax money stay invested instead of sending it to the IRS immediately, gradual Roth conversions can outperform a lump-sum conversion — even when Roth growth looks smaller on paper.
Why Gradual Conversions Can Win
The key to the advantage of the gradual conversion method is that the effective tax rate is lower, even the pretax amount grew. One overlooked dynamic is that growth itself can increase taxes. Growth inside a traditional IRA enlarges the amount eventually converted or withdrawn, expanding the taxable base and potentially pushing income into higher brackets. More compounding does not automatically mean higher after-tax wealth.
However, converting everything to Roth is not always necessary—or optimal. Retirees can use tools such as Qualified Charitable Distributions (QCDs) to remove pre-tax IRA assets tax-free, or convert only up to lower tax brackets over time. In practice, a balanced mix of Roth and traditional assets often provides greater tax efficiency and flexibility than an all-Roth strategy. Careful Roth conversion planning—not headlines or single-year tax minimization—determines whether you maximize or erode lifetime after-tax wealth.