How Much Tax Will You Pay on a $100,000 Roth Conversion?

A $100,000 Roth conversion can create a very different tax bill depending on whether you file as single or married filing jointly. In the examples below, a single filer with $40,000 of Social Security income and $12,000 of dividends would owe about $21,964, or roughly 22%, on a $100,000 Roth conversion. A married couple filing jointly with $60,000 of Social Security income and $12,000 of dividends would owe about $14,477, or roughly 14.47%, on the same $100,000 conversion.

The right Roth conversion strategy depends on your income, tax bracket, required minimum distributions, future tax assumptions, account growth, and legacy goals. Roth conversions are not right for everyone, but when they do make sense, converting too little may not meaningfully improve your future tax situation.

In this video transcript, Troy Sharpe, CFP®, walks through what a $100,000 Roth conversion could cost for both a single filer and a married couple filing jointly. The transcript below shows how Social Security income, qualified dividends, senior deductions, tax brackets, and filing status can change the actual tax cost of a Roth conversion. Troy also explains why converting too little may not meaningfully reduce future required minimum distributions, and why the right Roth conversion strategy should be modeled around your long-term retirement income, tax, and legacy goals.

Key Takeaways

• A $100,000 Roth conversion could cost about $21,964 in federal taxes for a single filer in the example shown.
• A $100,000 Roth conversion could cost about $14,477 in federal taxes for a married couple filing jointly in the example shown.
• The tax cost of a Roth conversion depends on your filing status, Social Security income, dividends, deductions, and other taxable income.
• One of the biggest Roth conversion mistakes is converting too little to make a meaningful difference in future retirement taxes.
• Roth conversions can help reduce future required minimum distributions, create more tax-free income, and potentially leave a tax-free legacy.
• A Roth conversion should be modeled before you act, because paying taxes today means that money is no longer available to compound in your retirement account.

Quick Answer: How Much Tax Will You Pay on a Roth Conversion?

The tax you pay on a Roth conversion depends on how much income the conversion adds to your tax return. In the example from this video, a $100,000 Roth conversion costs about $22,000 for a single filer and about $14,500 for a married couple filing jointly. Your actual tax cost may be higher or lower depending on your full retirement income picture.

Is a $100,000 Roth Conversion Worth It?

A $100,000 Roth conversion may be worth it if paying taxes today helps reduce future required minimum distributions, lowers lifetime taxes, creates more tax-free retirement income, or helps you leave tax-free assets to heirs. However, it may not be worth it if the upfront tax bill is too high, if you need the money for near-term spending, or if your future tax rate is likely to be lower.

Transcript

Why Roth Conversion Amounts Matter

So you’ve been reading about Roth conversions and you’re thinking about doing one yourself. But one of the biggest mistakes that people make is not converting enough of their IRA to the tax-free Roth.

I’m gonna show you what doing a $100,000 Roth conversion will cost if you’re married and if you’re single. First things first, not everyone should do Roth conversions. They are not in the best interest of every single person.

Key Factors to Consider Before Converting

One of the things that you have to take into consideration is the taxes that you pay today. Those are taxes that you no longer have.

You’ve given them to the IRS to move money to that tax-free Roth IRA, and that’s money that you won’t earn interest on over many, years. Now, that is not the only reason that you should look at for considering if a Roth IRA is in your interest or not, because future account balances, that’s one aspect, but there are other considerations that you should look at.

So one of them is just simply every dollar you move into a Roth IRA, there are no required distributions. So between the ages of 73 and the rest of your life, you’re not gonna be forced to take money out.

You’re not gonna be forced to stack that income on top of your other income, possibly in a time or an era where income tax rates are higher. Or when one spouse predeceases the other, when you go from married to single, all of that forced income won’t be compressed into these much smaller brackets.

So a lot of things to kind of think about there. This video is to simply show you what the cost is to do $100,000 Roth conversion.

Why a $100,000 Roth Conversion?

Okay, why did I pick $100,000?

Well, as I said initially, one of the big mistakes that people make, if this makes sense to go down this path for you, is doing too small of an amount. Let’s say you have a million dollars in your retirement account and you say, I’m gonna do 25,000.

Well, you’re moving a small amount relative to the overall portfolio balance. And let’s say you go 10 % up. Now you’re at 1.1 million. This 25,000 has grown to maybe 27,000. But the IRA has just gotten bigger and bigger and bigger, and you’re really just, you know.

dumping a little bit of salt into the ocean. You’re not making a big enough impact to really significantly improve your tax situation in the future.

So that’s why we picked 100,000 is to help you understand what that would cost. Now, you also have to understand that everyone’s gonna have a different level of social security, some maybe rental income, different amount of dividends and long-term capital gains and when you buy or sell stocks.

I’m just trying to isolate as many of the variables as possible and show you simply what it costs to help you understand some of these concepts.

Single Filer Baseline Scenario

So here, first we’re gonna start with a single person that has $40,000 of social security, total social security, and $12,000 of dividends, 10,000 of which of those are what we call qualified dividends.

Now, I’m showing you this with no Roth conversion first so we can create a baseline. I’m gonna do this also for the married filing jointly couple.

Here’s the number I want you to see, total tax, $0. So this couple is over the age of 65. have, or this individual’s over the age of 65, so they have a $6,000 enhanced senior deduction.

There’s another bonus deduction, smaller one for being over the age of 65. If you’re under the age of 65, this is still going to be a zero tax. So 40,000 of social security, 12,000 of dividends, zero percent tax, zero dollars in tax.

Cost of a $100,000 Roth Conversion for a Single Filer

Okay, so here’s the $100,000 Roth conversion and what the cost is. So single person here, everything’s the same. We still have the taxable social security. We still have the dividends.

And one thing to point out here is the enhanced senior deduction that has been phased out. So it went from 6,000 to 1740. That’s just simply because the conversion has created income that has pushed you past the threshold to where that phase out begins.

So that effectively just reduces that standard deduction or that senior deduction. So here’s the bottom line number, 21,964. So let’s call it $22,000.

So the effective tax rate for someone with this social security and single over the age of 65 is about 22%, 21.9%. So the question becomes, is that the right thing for you to do? Well, it has to be modeled.

You have to look at all these different scenarios. One to be aware of is that that’s 21,900 that you don’t have in your accounts compounding any interest for the rest of your life. But on the other hand,

Once required distribution start, you’re going to have to take this money out anyways and pay tax at some unknown rate in the future, depending how old you are today.

So it’s balancing how much risk you want to carry as far as the unknown tax rates in the future, how much you’re going to have to distribute, how much your accounts will grow, how much do you want to leave behind tax free taxable versus the account balance today, earning interest by not paying those taxes and allowing that to compound. So

How Personal Goals Impact the Roth Conversion Decision

A lot of decisions here, you just simply have to kind of model this out and make the decision. Again, considering the trade-offs of both, but what I always say is you want to re-anchor back to what’s most important to you.

So passing on a tax-free legacy is most important to you. Well, that may outweigh that the account balance may not be as high with the Roth conversion, but it’s going to be tax-free. So even though it’s lower, it’s all tax-free.

And if that’s what’s most important to you, that may move the needle in the favor of doing the conversion.

So there’s any number of these scenarios. This is really what planning is about. It’s about having these conversations, running the analysis, modeling it out.

And then this changes oftentimes every year. What’s important to you, the tax code, all of these things change. I guess right now I just want you to understand if you do this conversion with this level of income, it’s about $22,000.

Married Filing Jointly Baseline Scenario

Okay, so now if you’re married filing jointly, here’s the baseline scenario. So same $12,000 of dividends, $60,000. We have two social security checks here.

$12,000 enhanced senior deduction, total tax again, zero. So now what I’m doing here is we did a video recently called the tax torpedo where we looked at how taking one more dollar of income, even though if you’re in the 12 % bracket, often can be taxed at 20, 25, 30 % if you’re married and up to 50 % if you’re single.

So the tax torpedo video, I’m piggybacking all of these dividend and social security numbers off of that but that’s an important baseline concept to understand when it comes to deciding whether you want to do a Roth conversion. So at end of this video, we’ll put a link up top for you to go watch that if you’d like.

So baseline scenario here, again, our standard deduction is twice as much when we’re married than if you’re single, same with enhanced senior deduction and same with the income tax brackets. But here’s the baseline.

Cost of a $100,000 Roth Conversion for a Married Couple

Now here’s the $100,000, how much tax would be owed given these considerations.

So we’ll just jump right to it, 14,477. So we can see here on the enhanced senior deduction, we get a slight phase out, not nearly as much as the single filer, because you can have twice the amount of income if you’re married before the enhanced senior deduction starts to phase out.

So it has brought social security into a state of taxation. We go into that in the tax torpedo video to help you understand that a bit better.

Weighing the Trade-Offs of Roth Conversions

But bottom line, costs you about 14.47%. So to do $100,000 conversion, it costs you about 14%.

Same trade-offs, right? We have to understand that that’s not money or money we won’t have in the retirement account to compound over time, but we don’t know what tax rates will be in the future.

But more importantly, you have to make these decisions weighing the trade-offs relative to the decision itself, but then anchor back to what’s most important to you. What are you trying to accomplish?

Roth Conversion Guide and Next Steps

So I created a Roth conversion guide to essentially guide you through the process of making the decision of whether a Roth conversion is right for you to help you understand the things that you need to know before you make that decision.

So to get the guide, we put a link in the description. Just go click on that link. It’ll take you to the guide. And if you’re considering doing a Roth or you’ve been doing them, this will really enlighten you and help you look at Roth conversions from, I could say, a holistic point of view, not just…”How much money am I gonna have in the future?” Or I don’t wanna pay taxes in the future. So it’s a really good read. I encourage you to go get it.

Understanding the Tax Torpedo

And also I told you that we would put up the video at the end of this one that talks about the tax torpedo. So click this one right here and this will give you a deeper understanding of how income is taxed when you make these distributions.

Go check out that video.

Frequently Asked Questions About Roth Conversions

How much tax do you pay on a $100,000 Roth conversion?

In the examples shown, a $100,000 Roth conversion creates an estimated federal tax bill of about $21,964 for a single filer and about $14,477 for a married couple filing jointly. The actual amount depends on your income, deductions, filing status, Social Security taxation, dividends, and other tax factors.

Why does a Roth conversion cost more for a single filer?

A single filer generally has smaller tax brackets and a smaller standard deduction than a married couple filing jointly. That means the same $100,000 Roth conversion can push more income into higher tax brackets for a single filer.

Can a Roth conversion make Social Security taxable?

Yes. A Roth conversion can increase taxable income, which may cause more of your Social Security benefits to become taxable. This is one reason Roth conversions should be modeled before making a decision.

What is the biggest mistake people make with Roth conversions?

One common mistake is converting too little. If a retiree has a large IRA balance, a small Roth conversion may not significantly reduce future required minimum distributions or future tax exposure.

Are Roth conversions right for everyone?

No. Roth conversions are not right for everyone. The decision depends on your current tax rate, future tax assumptions, retirement income plan, account balances, estate goals, and whether you can afford to pay the taxes created by the conversion.

Should I do a Roth conversion before required minimum distributions start?

Many retirees evaluate Roth conversions before required minimum distributions begin because they may have more control over their taxable income during those years. Whether it makes sense depends on your personal tax situation and long-term retirement plan.

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