Why I Did A Large Roth Conversion In 2025 -Action Economics

We were on track to end 2025 with the majority of our paper assets in traditional IRA/401K accounts. Many years ago I bought into the idea of seeking to pay the least amount of taxes possible, and wore it as a badge of honor that I was able to pay $0 in federal income taxes. I was SOOO smart, I figured out the tax code and paid nothing! This of course came with a long term price. I was contributing heavily to pre-tax traditional IRAs while I was in a low tax bracket. This would have been a great strategy if we never invested in real estate. With our rental real estate business we generate a large amount of taxable income and will generate much more in the future, pushing us into higher brackets. I looked up this year and realized ohhh. I have a Roth Conversion Problem! I may have been minimizing my taxes for each year, but NOT across my lifetime.

The Problem:

In the future I expect that tax rates will likely be higher. Our country is $38 Trillion in debt and we haven’t had a serious attempt to cut spending since 1994’s contract with America, which only slowed the rate of spending. Even with current tax rates it is highly likely that we will be solidly in the 22% tax bracket just from our real estate portfolio in early retirement. This means that any future withdrawals from traditional pretax accounts will be in equal to or higher tax brackets than we are in now. This is even worse than it sounds because when we claim Social Security it will push us into even higher brackets. Another issue? Withdrawals from pretax accounts also count as income for ACA calculations while withdrawals from Roth accounts do not.

The Trump tax cuts currently sunset after 2028, so without congress acting tax brackets will jump.

On an individual level, our problem is largely due to our investment in real estate. Our income from real estate is the first income we earn and we are projecting this alone will push us into the 22% tax bracket. When I originally started contributing to all pretax accounts my thinking was that I would owe very little tax in the future because withdrawals would be the first money used. Even building to $600,000 in pretax accounts at a 5% withdrawal rate would just fill the current standard deduction, the 0% tax bracket. Since our situation has evolved our strategy must evolve as well.

The Missed Opportunities:

I failed to convert at several times that would have been ideal, even though I identified them. The first time I identified that would have been a great opportunity to convert was in April of 2020. During Covid stocks had fallen dramatically AND most people, including myself, had a large reduction in total income. Our total taxable income in 2020 was $59,000. We had $21,000 of available space in the 12% bracket, and $90,000 available in the 22% bracket.

On April 3rd 2020 the day I wrote the above article, Tesla stock was at $32 per share. When I converted Tesla shares at the end of 2025 it was at $489/share. (I first invested in Tesla in 2016) I converted 173 shares recognizing income of $85,000. Had I converted those 173 shares in April of 2020 I would have only had to recognize $5,536 in total income. It would have cost me just $665 at the time, instead of almost $20,000. I could have converted ALL of my Tesla shares in traditional accounts and still stayed in the 12% bracket. This was a big missed opportunity. Of course the bigger miss was not buying more Tesla when I originally invested. I was trying to be risk adverse and thought putting 20% of my investible assets into Tesla was already a big risk. Had I put in 50% my world would be very different right now.

Why didn’t I convert in 2020? I thought I had time. I planned to convert at the end of the year…Tesla skyrocketed between April and December of 2020 and ended the year at $235 per share. I figured I would wait for a pullback…and when a pullback did occur, I was no longer paying attention. I also was treading water with my main focus trying to generate cash. I got laid off at the end of March and my state shut down most economic activity. I was worried about my checking account, not my taxes in 20 to 30 years.

2023: 2023 was a good year for me to convert as well. Tesla stock was trading for under $200 per share for most of 2023. 2023 also was not a high income year for us. I had stopped my travelling jobs and only had a single outage in 2023 at my home plant. I actually did do a Roth conversion in 2023, I just didn’t do enough. I converted roughly $10,000 and had total taxable income of $85,000 including this conversion, I had stopped just short of entering the 22% tax bracket.

The price of the assets matters just as much as the tax bracket. Converting the 173 shares I converted even in the same 22% tax bracket would have only recognized $34,600 in income and cost $7,600. It would have been way better for me to have converted last year in the 22% bracket, or even the 24%, or the 32% bracket!

No Time Like The Present:

I wasn’t thinking about Roth conversions until I was working on my oldest son’s financial plan and found that he had an opportunity for an in plan Roth conversion for his 401K. His 401K contributions are all Roth, but the employer match is not. This year it makes sense for him to convert the last couple years worth of employer matches in his 401K.

We recently did a cash out refinance on our 6 unit apartment building and took a substantial amount of cash out, most of it we used to pay off short term debt that we had on credit cards and on our heloc from other real estate investing activities (NOT consumer debt). We decided at the last minute (a week before the end of the year) that a Roth conversion was the right move for some of this capital. Here’s why.

Options For Cash:

Pay down 7% debt on heloc
Roth Conversion
Roth IRA contributions up to 14K
Buy more real estate

I quickly eliminated buy more real estate as an option. We are swamped with work on the real estate end. We had 6 tenants move out in 3 months, directly after completing 3 rehabs. We are in the middle of getting a house ready to sell, we have 3 apartments to flip, and another empty house waiting to be cleaned and repaired. We have another house coming back to us in the early spring. We are exhausted on rehabs. The real estate we have is plenty for now.

The next option we mathematically eliminated was the Roth IRA contributions. We already have enough in our retirement accounts that any reasonable growth rate would have us with a comfortable retirement. I also contribute enough into my Roth 401K for an employer match and contribute to an HSA for roughly $15,000 total still getting added to investments per year. On the math side of things I could buy $14,000 in new assets or convert $56,000 to Roth. I feel the conversion makes more sense. Another caution here: When making a large Roth conversion that recognized income counts towards the MAGI for being able to contribute to a Roth IRA. Prior to making a large conversion ensure that you stay below this number and/or ensure you don’t make a Roth contribution before hand.

As far as paying down the debt goes, we did this with the majority of the proceeds. Less than 15% of the proceeds went to Roth conversions. For any additional debt $10,000 paid off would eliminate $700 per year in interest expenses. When we sell the house we are working on now we will be on track to empty our heloc from cash flow over the next 6 months, after that the additional funds would be cash earnings very little in our bank account.

I ended up converting $85,000 of Traditional accounts to Roth, all in the 22% tax bracket, all of Tesla stock to get us to the edge of the 22% tax bracket. My account is with Vanguard and the process was extremely easy. It took under 10 minutes to complete and had clear instructions along the way.

One of my overarching goals is to reduce risk at this point. Converting to Roth reduces several different future risks. It reduces the risks of:

Future tax rate increases
Increases in our rental income over time
Individual stocks in our retirement accounts outperforming S+P 500 projections.
ACA Premium increases

Age Is Another Factor:

Mrs. C. and I are still relatively young, however we aren’t too far off from potentially wanting to use funds from our retirement accounts. Mrs. C. is 43 and I am 39. When Roth conversions are performed you must wait 5 years prior to withdrawing any of those converted funds or else face a penalty and additional taxes. The sooner we perform conversions the sooner we are clear from this possibility. It is unlikely that we would want to remove funds in 5 years, but it certainly is likely in 10 years using an SEPP plan. With that in mind we don’t have a huge runway to convert.

In theory we could wait until after I no longer have a W2 job to convert, but that also adds risk, and who knows, I may want to keep working my W2 job for a decade or more if the deal is structured correctly. My projections also show our real estate activities pushing us into the 22% bracket and my W2 income occasionally pushing us into the 24% bracket, there is only a 2% difference in tax rate whether I have the W2 job or not.

A big concern for after I no longer have a W2 job is the cost of ACA premiums. ACA completely destroyed the insurance market and has caused the cost of insurance to skyrocket. They also tied the cost of insurance premiums to income rather than to weighted risk. Our total income is irrelevant while covered by an employer plan. No matter what our income is, our premium stays the same. Getting an ACA plan our premiums can vary from $0 per year to $2,000 per month. This is also more difficult as Kid #2’s income would also count towards total income. Converting and recognizing income in years where I know I have employer coverage is far better than in years where I won’t. On another note, it makes sense to sell properties and recognize capital gains while covered by an employer plan. Once we are covered by the ACA again those long term capital gains would count against us and it would likely be better to do 1031 exchanges.

My Big Bet On Tesla:

My big bet, that I started in 2016 is that Tesla will become the most valuable company in the world. Elon was laughed at in 2014 when he stated that Tesla could be worth $700 Billion by 2025 (It’s worth twice that in 2025) I think several of Tesla’s businesses are going to hit their strides in the next couple of years and it is highly likely Tesla will see returns far exceeding the historic stock market averages. Large scale storage/ distributed grid, Semi trucks (factory complete!), Cybercab, FSD, and Optimus are these businesses. In a bull case, Tesla may 4X in the next 5 years and 10X by the time I am of retirement age. If this happens it also proves beyond a doubt that the conversion in 2025 was the right move.

I felt like I was out of time. That is why I did a large conversion in 2025. I plan to do another conversion in 2026, especially if Tesla sees a pullback. For 2026 our income will be a bit higher. We plan to recognize around $45,000 of capital gains from the sale of 2 properties and our income from rental activities is expected to be higher. Since it is a single outage year at my home plant I will have significantly less W2 income.

The Downside?

If Tesla pulls back 50% in the next few months and stays there then yes, it will mean I threw money away on my conversion and lost about half the conversion taxation, which would be around $10,000. I don’t want to lose $10,000, but I can certainly afford to at this stage of my life. The bet is worth it. I think it is far more likely that Tesla will double next year than get cut in half.

If for some reason Mrs. C. and I fully exit rental real estate, then this would have been a bad move. With rental real estate that income fills the lower tax brackets. Without it, we would want Traditional retirement accounts that we deferred tax in the 22% brackets and withdrawal in the 0% – 12% brackets. Since we are on track to full eliminate traditional accounts, in a situation where we stopped having rental income we would likely increase our lifetime taxes paid.

Action Items:

For most people Roth conversions don’t need to be done. Most people don’t have a six figure source or rental income in their retirement. Most people aren’t heavily invested in a single growth stock. Most people never have more money in retirement assets than could convert into the 22% bracket or higher. For most people it doesn’t make sense to do Roth Conversions.

Roth conversions are great for people in low tax brackets like my oldest son. They are also great for people with several million saved in pre-tax accounts. They are also great for people with substantial income from non retirement account sources in retirement.

I plan to make substantial conversions in 2026-2028, with a goal to exit 2028 with all of my retirement assets in either Roth accounts or HSA accounts with the exception of employer matching funds. My 401K does not allow for in plan conversions, so until I leave my W2 job I can not convert those funds. I have only had a match available for the last 18 months, so <2% of our retirement funds are in this trapped traditional 401K space.

What do you think of my Roth Conversion? Are you planning to do a conversion in 2026?