A ‘BETR’ way to assess Roth IRA conversions

Research summary

August 28, 2025 The break-even tax rate (BETR) offers a smarter, more comprehensive way to evaluate Roth IRA conversions. By factoring in current and future tax rates, funding sources, and investment horizons, the BETR can help investors and advisors make informed, tax-efficient decisions that support long-term retirement goals.

For years, the advice on Roth IRA conversions has been straightforward: Convert if you expect your tax rate to be higher in retirement. But that rule of thumb can be an oversimplification. Real-life financial decisions are often more nuanced—and that’s where the BETR framework comes in. It offers a smarter, more precise way to evaluate whether converting a traditional IRA to a Roth IRA makes sense. “Our findings challenge the prevailing assumption that Roth conversions are only beneficial when future tax rates exceed current ones,” said James M. Passman, CFA, wealth planning methodology analyst at Vanguard and lead author of the Vanguard research paper A ‘BETR’ Approach to Roth Conversions. Instead of relying on broad assumptions, BETR calculates the exact marginal tax rate at which a conversion becomes financially neutral. If your future tax rate is higher than your BETR, converting could be a win. If it’s lower, you might want to reconsider. This approach reframes a general guideline as a personalized analysis—one that accounts for funding sources for taxes, investment horizons, and basis. (Basis is the portion of a traditional IRA funded by after-tax contributions.) For advisors, the BETR provides a powerful tool to guide clients through these decisions with greater clarity. By helping clients understand their BETR, advisors can deliver more tailored, tax-aware strategies that support long-term retirement goals.

What sets the BETR apart is its ability to account for the real-world variables that influence conversion outcomes. It even considers plans for future Roth contributions through a backdoor strategy—a two-step sequence where a nondeductible traditional IRA is funded and then converted to a Roth. These details matter—and they often determine whether a conversion adds long-term value. That’s where advisors come in. The BETR equips them with a framework to bring these nuances into focus, helping clients understand how each factor affects the break-even point. “The BETR model demonstrates that the tax payment source materially alters conversion outcomes—an insight underexplored in most models,” Passman said. The BETR highlights how the tax payment source can shift the break-even point in meaningful ways. For example, when conversion taxes are paid from a taxable account—particularly one holding tax-inefficient assets or cash—the BETR drops well below the investor’s current marginal tax rate. Likewise, basis in a traditional IRA or the potential for future backdoor Roth contributions can shift the math in favor of converting. This creates a wider “conversion zone,” where even modestly lower future tax rates can still justify a Roth conversion. By surfacing these subtle but powerful distinctions, the BETR helps advisors move beyond rules of thumb and toward more tailored, tax-aware strategies.

Notes: All calculations assume a 35% ordinary income tax rate, 0% IRA basis, and a 20-year investment horizon. Scenarios 1, 2, and 3 assume a 6% annual return and a 2% dividend yield. Scenarios 2 and 3 apply an 18.8% tax rate on both dividends and long-term capital gains and assume that no additional tax liability is incurred when liquidating assets in a taxable account to pay the conversion taxes. Scenario 4 assumes 2% interest on cash. This hypothetical illustration does not represent the return on any particular investment and the rate of return is not guaranteed. Source: Vanguard.

The BETR’s dynamic nature makes it especially valuable in today’s uncertain environment. For advisors, it offers a way to bring greater clarity to complex decisions as they help clients to navigate the shifting variables with confidence. The BETR supports a personalized, adaptive approach to retirement planning—one that evolves with a client’s financial picture. “The BETR turns uncertainty into insight—giving advisors a data-driven way to guide clients through complex Roth decisions with confidence, even in evolving market and tax situations,” Passman said. Related Links Article 8 min read How financial advice can reduce stress and save time Jul 09, 2025 Article 8 min read Jul 09, 2025 Article 7 min read Social Security: For some, early claiming is better Feb 27, 2025 Article 7 min read Feb 27, 2025 Article 7 min read Diversify the way you think about diversification Sep 11, 2024 Article 7 min read Sep 11, 2024 Notes: All investing is subject to risk, including the possible loss of the money you invest. We recommend that you consult a tax or financial advisor about your individual situation. Diversification does not ensure a profit or protect against a loss. CFA® is a registered trademark owned by CFA Institute. Contributor James M. Passman, CFA Vanguard Information and Insights Subscribe to Vanguard. Get Vanguard news, insights, and timely analysis on the market, delivered straight to your inbox. Read our online privacy notice to learn about how we keep personal information private. You have certain cookies disabled on the Vanguard site. In order to watch videos on this site, you must agree to the use of cookies provided by YouTube. Click here to permit these cookies and watch the videos.