Characteristics and Motives of Roth Converters: Evidence from the 2010 Repeal of Income Limits

Abstract

We study Roth conversions using administrative tax data on the universe of individuals who made conversions from 2003 through 2015. Specifically, we document time trends in conversions, investigate how the 2010 removal of Roth conversion income limits affected conversions in that year, show the extent to which removal of these limits allowed for “backdoor Roth” contributions thereafter, and explore potential motives for Roth conversions. We find aggregate conversions increased by over 700% in 2010 compared to the prior year and that an increasing share of converters are backdoor converters: while approximately 1.5% of converters were backdoor in 2009, by 2015 it was more than 37%. Individuals who made conversions in 2010 could recognize the resulting income immediately or in equal amounts in 2011 and 2012. We estimate that approximately 31% of individuals made the ex post incorrect decision: they could have reduced their tax liability by making the opposite choice and the median extra tax liability was $320. We find evidence in support of several Roth conversion motives: individuals are more likely to convert in a transitory low tax year, use Roth accounts as diversification against tax rate uncertainty, and, among individuals who contribute the maximum in other retirement accounts, use conversions to increase after-tax savings.

Keywords: Individual Retirement Arrangements, Roth IRA, Roth conversion, asset accumulation, income taxation, retirement

JEL Classification: D14, H24