Balancing Roth Conversions and Tax Deferral: Crafting a Smarter Retirement Strategy

The Traditional Approach: Deferring Taxes

Over the last 50 years, investors have become very familiar with the adage “Defer, defer, defer!” when it comes to tax planning. The most accessible deferral vehicles have long included employer-sponsored 401(k) plans, traditional IRAs, and deferred compensation programs.  By pushing income into the future, these tools allow high earners to reduce immediate taxable income and rely on lower anticipated tax rates in retirement. With constant changes in tax law, many individuals are finding themselves overwhelmed by competing messages for what efficient retirement planning looks like in a rapidly shifting environment.

The Rise of Roth Accounts & New Rules

While Roth IRAs and Roth 401(k)s are not new, their popularity has been on the rise following the 2019 Secure Act 1.0¹ and the implementation of the “10-Year Rule” for most non-spouse beneficiaries² of inherited retirement investments. These changes disrupted decades of conventional estate planning by limiting which beneficiaries can “stretch” withdrawals from inherited IRAs and 401(k) s over their lifetimes. The law now generally requires the account be fully liquidated within 10 years of the original account owner’s passing. Individuals who have been diligent about saving for retirement, now seeing large balances in tax-deferred accounts, are realizing that this wealth could eventually be subject to significant taxation, both during retirement and by future generations. It is this fear that has sparked a surge of interest in Roth strategies and Roth conversions.

Why Deferral Still Matters

Traditional deferral strategies remain a powerful component of retirement planning. Deferring compensation allows high earners to postpone income and therefore income taxes until a future date (typically retirement). This deferral often serves the greatest benefit to individuals in the highest tax brackets today but anticipate income to decline in the future. The tax savings generated today can be reinvested, compounding returns over time. Tax-deferred investments also continue to make sense for those seeking to manage short-term cash flow.

The Risks of Solely Deferring Taxes

The risk that exclusively relying on tax-deferred assets in retirement planning can push retirees into unexpectedly higher tax brackets is something many individuals learn for the first time once they are already in retirement. Many retirees are finding that between Social Security income, Required Minimum Distributions (RMDs), and other investment withdrawals, taxable income does not drop as significantly as once assumed. This can also increase Medicare premium costs, which are calculated based on annual income³, adding yet another layer of financial strain in retirement.

Striking the Right Balance

When choosing how to fund retirement, like with everything, the key is balance. There are no guarantees for market performance, future income tax rates, or the beneficiary distribution rules. The best strategies find a balance of what we know today and what we believe to be reasonably true tomorrow. For those who anticipate tax rates will be higher in the future than today, funding Roth investments will help mitigate income in retirement by providing tax-free growth and no RMD for the original account owner. This is also true for those who believe they are likely to earn significantly more in the future; funding Roth investments today will provide multiple diverse asset “pools” as individuals fund tax-deferred investments in their highest-earning years.

Flexibility: The New Retirement Planning Imperative

In the age of Roth conversions, the goal is no longer simply to defer taxes indefinitely; it’s to manage when and how taxes are paid to build long-lasting after-tax wealth. Whether through smart deferral strategies, disciplined Roth conversions, or a combination of both, successful investors recognize that flexibility, not deferral alone, is the real key to long-term financial success.

Ready to take charge of your retirement planning? Speak with our financial advisors today to review your tax strategies and ensure you’re making the most of every opportunity for your future.

Sources:

¹Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94, 133 Stat. 2534 (2019).

²Clements, S. (2023, February 15). The IRS’s 10-year rule for inherited IRAs: Kiplinger tax letter. Kiplinger. https://www.kiplinger.com/taxes/irs-10-year-rule-for-inherited-iras-kiplinger-tax-letter

 ³Kiplinger. (2025, November 7). Medicare premiums 2026: IRMAA brackets and surcharges for Parts B and D. https://www.kiplinger.com/retirement/medicare/medicare-premiums-2026-irmaa-brackets-and-surcharges-for-parts-b-and-d