Where the tax comes from
Cash outside the IRA gives $2,038. The converted money itself gives -$7,047 — a difference of $9,085 less (-445.8%).
Same conversion, same rates. Paying the tax out of the IRA removes that money from twenty years of tax-free growth, which is where the advantage goes.
| Input | Cash outside the IRA | The converted money itself |
|---|---|---|
| Amount to convert(usd) | 100,000 | 100,000 |
| Share of it that is pre-tax(percent) | 100 | 100 |
| Your tax rate this year(percent) | 24 | 24 |
| Your tax rate at withdrawal(percent) | 22 | 22 |
| Years until you withdraw(years) | 20 | 20 |
| Annual return(percent) | 6.5 | 6.5 |
| Pay the conversion tax from | Cash outside the IRA | The converted money itself |
| Capital gains rate on outside money(percent) | 15 | 15 |
| What converting is worth | $2,038 | -$7,047 |
Every figure, both ways
| Step | Cash outside the IRA | The converted money itself | Difference |
|---|---|---|---|
| Amount taxed as income this year | 100,000 | 100,000 | 0 |
| Tax due for the conversion year | 24,000 | 24,000 | 0 |
| What actually lands in the Roth | 100,000 | 76,000 | -24,000 |
| Roth at withdrawal, all yours | 352,364.51 | 267,797.02 | -84,567.48 |
| Traditional balance if you leave it | 352,364.51 | 352,364.51 | 0 |
| Traditional after tax at withdrawal | 274,844.31 | 274,844.31 | 0 |
| The unspent tax money, invested instead | 84,567.48 | 0 | -84,567.48 |
| That side account after capital gains tax | 75,482.36 | 0 | -75,482.36 |
| Not converting, all in | 350,326.67 | 274,844.31 | -75,482.36 |
| What converting is worth | 2,037.83 | -7,047.29 | -9,085.12 |
| Retirement tax rate where the two are equal(%) | 21.42 | 24 | +2.58 |
| Tax paid per dollar converted | 0.24 | 0.24 | 0 |
Questions people actually ask
- Does lowering pay the conversion tax from change the answer in proportion?
- The two sides differ by 445.8% in the answer. Read the step table below to see which line moves and which does not — that is where a formula stops being a black box.
- What is held constant between the two columns?
- Everything except pay the conversion tax from: amount to convert, share of it that is pre-tax, your tax rate this year, your tax rate at withdrawal, years until you withdraw, annual return, capital gains rate on outside money. That is what makes the difference attributable — change two things at once and neither column tells you which one moved the answer.
- Can I compare my own two numbers?
- Yes, from the address bar: add ?a.pay_tax_from=… and &b.pay_tax_from=… to set each side, and a parameter without a prefix sets both at once. The page is computed per request, so any pair works — these two are only the ones worth a link.
Change either side by adding query parameters — ?a.pay_tax_from=… and b.pay_tax_from=…. A parameter without a prefix sets both sides at once. Source: IRS — Roth IRAs, including conversions, IRS Publication 590-A — converting from any traditional IRA into a Roth IRA, IRS Publication 590-B — the additional tax on early distributions and the five-year rules