A Smarter Way to Judge a Roth Conversion: The Break-Even Tax Rate

Taxes By the RetiPilot Editorial Team · Jun 18, 2026 · 7 min read

The usual advice says convert to a Roth only if your future tax rate will be higher than today’s. Vanguard’s break-even tax rate research shows that rule of thumb can leave money on the table — sometimes a lot of it.

The rule of thumb, and where it breaks

The conventional comparison is simple: pay tax now at your current rate (Roth) or later at your future rate (traditional). If the two rates are equal, the math comes out identical, so the standard advice is to convert only when you expect a higher rate later.

But that framing quietly assumes the conversion tax is paid out of the IRA itself. In practice, many investors pay it from a taxable brokerage or cash account — and that changes the arithmetic. Money used to pay the tax leaves an account where its growth would have been taxed every year, and the full IRA balance moves into an account where growth is never taxed again.

The break-even tax rate (BETR)

Researchers at Vanguard formalized this with a single number: the break-even tax rate, the future tax rate at which converting and not converting produce the same after-tax wealth. If your expected future rate is above your BETR, converting wins; below it, waiting wins.

The key insight is that paying the conversion tax from a taxable account pushes the BETR below your current tax rate. In Vanguard’s illustrations, an investor in the 35% bracket who pays the tax from a tax-efficient taxable account has a break-even rate of roughly 30% over a 20-year horizon; paying from a tax-inefficient account drops it further, into the low-to-mid 20s, and paying from low-yielding cash lower still. In other words, a conversion can make sense even if you fully expect your tax rate to fall in retirement — as long as it doesn’t fall below your break-even rate.

What lowers your break-even rate

Three situations make converting more attractive than the rule of thumb suggests. First, paying the conversion tax from taxable money, especially over a long horizon — the longer the Roth compounds tax-free, the lower the BETR drifts. Second, having nondeductible (after-tax) basis in your traditional IRA, since that portion converts tax-free. Third, if converting clears out your only traditional IRA, it can open the door to future backdoor Roth contributions, which lowers the break-even rate again.

None of this means everyone should convert everything. Large conversions can spike your bracket and raise Medicare premiums through IRMAA two years later, and diversifying across account types has real value. But if you’ve been dismissing a conversion because “my rate will be lower later,” the BETR is the better test — and our calculator computes it for your numbers.