The Good Better and Best Roth Conversions for Railroad Retirement

Title: The Best Way to Do Roth Conversions for a Great Railroad Retirement

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. I'm John McNamara of Highball Advisors, and today we’re diving into Roth conversions—how to approach them wisely to make the most of your railroad retirement.

There’s really no bad way to do a Roth conversion—but some ways are definitely better than others. I’ve broken it down into three levels: Good, Better, and Best Roth conversion strategies.

What is a Roth Conversion?

A Roth conversion is when you take money from your tax-deferred accounts—like your 401(k) or IRA—and move it into a Roth IRA. That money has never been taxed, so when you convert it, you’ll pay taxes now in exchange for tax-free growth and withdrawals later.

Remember, with tax-deferred accounts, you have a silent partner: the IRS. At some point, they want their share. The goal is to manage how and when they get paid—ideally, in a way that benefits you.

When Should You Consider a Roth Conversion?

Ask yourself this:

“Will my tax rate in retirement be the same or higher than it is now?”

If the answer is yes, Roth conversions could make a lot of sense. But if you expect your tax rate to drop significantly in retirement, it may not be the right move.

Let me walk you through an example to show why this matters.

A Typical Scenario

Say you're 50 years old with $500,000 in your 401(k). If you don’t touch it and it grows at an average market return of 9.33% (based on the S&P 500's historical performance), by age 75, that account could grow to over $4.6 million.

At that point, the IRS requires you to start taking Required Minimum Distributions (RMDs). Using their formula, your first RMD at age 75 would be around $189,024, taxed as ordinary income.

Now imagine you’re collecting railroad retirement benefits and being forced to withdraw nearly $190,000—this could easily push you into a higher tax bracket. That’s why it makes sense to consider Roth conversions before RMDs kick in—reducing your future tax burden and keeping more of your money working for you.

The Three Ways to Do Roth Conversions

Here’s how to approach a $50,000 Roth conversion if you're in the 22% tax bracket (that’s $11,000 in taxes):

1. Good: Pay Taxes from the IRA

You take $50,000 out, pay $11,000 in taxes directly from the IRA, and convert $39,000 into the Roth. ✅ It works—but you’re losing some tax-free growth potential.

2. Better: Pay Taxes from a Taxable Brokerage Account

You convert the full $50,000 into the Roth, and use money from a taxable account to cover the $11,000 tax bill. Maybe that $11,000 comes from selling appreciated stocks, generating a long-term capital gain taxed at 15%—that’s only $1,650 in capital gains tax. ✅ More money goes into your tax-free Roth.

3. Best: Pay Taxes from a Savings Account

Same full $50,000 conversion, but this time, you pay the $11,000 in taxes using cash from a savings account or CD. ✅ No capital gains, no extra taxes—just a clean, efficient transfer.

That’s the ideal scenario, but depending on your financial situation, you might toggle between “better” and “best.”

Final Thoughts

Roth conversions can be a powerful strategy for building a tax-free retirement income—especially for railroaders approaching retirement. I walk clients through this as part of my Boarding for Railroad Retirement Process, so if you're near retirement, consider signing up.

Please share this video with fellow railroaders and subscribe to stay up to date on all things railroad retirement.

Until next time—stay safe, stay on track, and take care!

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.