A lot of people with large traditional IRAs are thinking about converting to Roth right now. The appeal is obvious: tax-free withdrawals in retirement, no required minimum distributions, and a cleaner situation for your heirs. What most people do not think hard enough about is what a conversion costs in the year you do it.
Dave Ramsey took a call on The Ramsey Show from Lisa, a 54-year-old with $2.8 million in a traditional IRA. She and her retired husband were living on $150,000 a year from the same account. She wanted to know if it made sense to convert the entire balance to Roth at once.
Ramsey’s answer was blunt. Here is the math behind it, and what you need to know before making a similar move with a large traditional IRA.
One tax year, $2.8 million, and a $700,000 tax bill
When you convert a traditional IRA to a Roth, the full converted amount becomes ordinary income in the year it happens. Not spread across years, not taxed at capital gains rates. Ordinary income, all of it, in that one calendar year.
Also read: Suze Orman says a $1.6 million retirement tax move could backfire
For Lisa, converting $2.8 million at once would push nearly the entire balance into the 37% federal bracket. That bracket begins above $768,700 for married couples filing jointly in 2026, per IRS figures. Ramsey’s estimate for the federal tax bill was roughly $700,000.
“It probably costs you $700,000, which makes me want to puke,” he said on the show.
Alabama state income taxes, which go up to 5%, would add to that. The exact number also depends on the couple’s deductions and any other income they report in the conversion year.
The $200,000-a-year strategy Ramsey recommends instead
Ramsey’s suggestion was to convert about $200,000 a year over six years rather than moving the full balance at once.
The numbers on that approach are very different. Lisa and her husband already have $150,000 in annual IRA withdrawals on their return. Add a $200,000 Roth conversion and total gross income for the year goes to $350,000. After the 2026 standard deduction of $32,200 for married couples filing jointly, taxable income lands at about $317,800.
The converted dollars stay inside the 22% and 24% brackets rather than hitting the 37%. Ramsey estimated the annual tax cost at roughly $50,000.
Across six years, that comes to about $300,000 in total taxes. That is less than half what a one-year conversion on the full balance would cost, and the payments are spread across multiple years. You are still paying taxes on the conversion. You are just not paying them all at once at the top rate.
The downside is paying sooner. But Ramsey’s case is that rates may be higher in the future, particularly after required minimum distributions kick in. Ramsey has made this case: locking in a rate you know today can beat waiting on a rate that might be worse.
RMDs and a surviving spouse can push future taxes even higher
Lisa is 54. Required minimum distributions generally begin at age 75 for people who turn 74 after 2032. A $2.8 million IRA that goes unconverted will be larger by then, and the mandatory annual withdrawals on a balance that size would generate significant taxable income in years when there is no option to skip them.
There is a surviving spouse issue too. Lisa’s husband is older. If she eventually files taxes alone, her brackets narrow. The 37% bracket starts at $640,600 for single filers in 2026, compared to $768,700 for married couples. Income that fits inside the 35% bracket today can slide into the 37% bracket once she is filing as a single taxpayer.
Heirs face a different version of the same problem. Most adult children who inherit a traditional IRA must empty it under the 10-year rule. If they are in their high-earning years when that happens, those withdrawals get added to their existing income and taxed at their marginal rate.
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Money inherited from a Roth IRA comes out tax-free under the same 10-year window. On an account this size, that gap matters. A conversion can also raise Medicare premiums and affect Social Security taxation in the same year, so those need to be factored in as well.
Ramsey noted on the show that he converted his own retirement money. He said he originally did it for the tax-free growth, and came to appreciate the estate-planning side of it later.
Before converting a large traditional IRA, check the math first
A Roth conversion is not the right call in every situation. If your tax rate now is roughly the same as it will be later, the timing generally does not change what you end up with. The strategy produces better results when your current rate is lower than what you expect to pay down the road.
Before you act, find the top of your current tax bracket and cap your annual conversion at that number. Pull the IRS distribution tables and estimate what your required minimum distributions would look like starting at 75. Run the surviving spouse scenario using single-filer brackets to see how the picture changes.
Pay the conversion taxes from money outside the IRA when you can. Using IRA funds to cover the bill shrinks the amount you actually converted. For money withheld from the IRA before you turn 59 and a half, you may also owe the 10% early-withdrawal penalty on the withheld amount.
A CPA or fee-only financial planner can run the numbers across different conversion amounts and timelines. A decision this size is worth getting modeled properly before you commit to it.
Related: Jim Cramer sends a strong verdict to retirees on tax rule
