Sometimes, life goes one way when you planned on it to go another.
In the case of retirement planning, let’s say you’ve been saving money in a tax-deferred retirement account (like a traditional individual retirement account (IRA) or employer-sponsored 401(k) plan) that lets you skip taxes when you contribute and only pay the piper once it’s time to make withdrawals in retirement. But midway through your career, your goals or circumstances change.
It could be that your view on taxes has changed—rather than wanting to avoid taxes on contributions now, you don’t want to have to pay taxes on those funds ever again. Or perhaps you were willing to accept required minimum distributions (RMDs) in retirement, but now you’ve decided you want to pass your nest egg to your heirs tax-free.
What can you do? Well, a Roth conversion, for one.
A Roth conversion is a way to move your money from a traditional retirement account to a Roth account. When you convert your money, you’ll need to pay taxes on it just like you would if you spent it. But once it’s in the Roth account, it can grow tax-free and without ever needing to be touched by you again. While there might be some tax implications in the year(s) of conversion, it can still be a useful way to enjoy the benefits of a Roth account for retirement.
Read on as I cover what a Roth conversion is, how it works, the advantages and disadvantages of using one, and how to do one.
Disclaimer: This article does not constitute personalized tax advice. This information appears for your education only. Act at your own discretion, and consider talking to a financial and/or tax professional about these and other tax strategies.
What Is a Roth Conversion?
A Roth conversion entails moving assets from one or more tax-deferred retirement accounts, like an IRA or 401(k), into a Roth account.
Converting to a Roth IRA results in tax consequences in the year of conversion. It can’t be undone. But once you finish the conversion, the remaining funds can generally both grow and be withdrawn tax-free going forward.
But if both traditional retirement accounts offer tax advantages, why convert to a Roth IRA in the first place?
With a Roth IRA, while you don’t receive a tax deduction upfront for making contributions to your account as you would with a traditional IRA, 401(k) plan, or other tax-deferred account. Instead, you pay taxes on that money when you contribute, then pay no tax when you withdraw that principal, and if you’re at least 59½ and have had the Roth account for five years or more, pay no tax when you withdraw earnings, either. Put more briefly: You generally don’t have to deal with taxes when you withdraw from a Roth account in retirement.
Further, you never have to take RMDs from a Roth account—an appealing option if you’re interested in having full control over the timing of your retirement withdrawals or wish to leave money to your heirs.
Roth IRA Income Limitations
That said, contributing to a Roth IRA is subject to certain income limitations:
For the 2025 tax year, the maximum amount you can contribute to a Roth IRA is gradually reduced to zero if your 2024 modified adjusted gross income (MAGI) is:
- $150,000 to less than $165,000 for single and head-of-household filers ($146,000 to less than $161,000 for 2024)
- $236,000 to less than $246,000 for joint filers ($230,000 to less than $240,000 for 2024)
That also means you can’t contribute to a Roth IRA at all for 2025 if your modified AGI for the year is:
- $165,000 or more if you use the single or head of household filing status on your tax return ($161,000 for 2024)
- $246,000 or more if you’re married and file a joint return ($240,000 for 2024)
If you’re married but file a separate tax return, your annual maximum contribution is gradually reduced to zero if your modified AGI is between $0 and less than $10,000.
But even if you earn more than the limits outlined above, that doesn’t fully prohibit you from having (or even contributing to) a Roth IRA. You’ll just need to take the “back door.”
What Are the Benefits of a Roth IRA?
Roth accounts enjoy numerous advantages when saving for retirement—as long as you don’t earn too much money to contribute to one, anyways.
Here are the top benefits of contributing to a Roth IRA for your retirement savings:
- You can contribute after-tax money. If you think you’ll be in a higher tax bracket in retirement either because you’ll have more assets to withdraw or you think tax rates will head higher in future years, it makes sense to pay taxes on your contributions now when your rates are lower.
- No required minimum distributions (RMDs). As of 2024, all Roth accounts aren’t required to withdraw money at a certain age in retirement. You can park your investments there and withdraw the money when you actually need it—if ever. That money can go to your heirs and generally be tax-free for them as well.
- Diversification of accounts by tax treatment. Having flexibility with your retirement withdrawals can optimize your tax burden when you start taking retirement distributions. Tax-deferred accounts entail paying taxes when you withdraw money, whereas qualified distributions taken from Roth accounts are tax-free.
What Are the Drawbacks of a Roth IRA?
But Roth IRAs do have a few weaknesses:
- No upfront tax breaks. Roth accounts don’t allow for upfront deductions on your taxes. So, if you think your tax rate will be higher in your working years than your retirement, contributions to Roth accounts might not give you the tax benefits you expect.
- Can’t withdraw earnings for five years. If you want to withdraw earnings from your Roth account, you’ll need to have the money remain in your account for at least five years to avoid getting hit with a 10% penalty. So, if you’re contributing money you plan to withdraw in the next five years, just know that while you can withdraw the contributions, any earnings will have to go untouched.
- No tax benefits from giving away money from your traditional IRA to charity. If you plan to give away a significant amount of money to charity from your traditional IRA through qualified charitable distributions (QCD), your same dollar of contribution would have you give away less through a Roth IRA than you would with a traditional IRA.
Related: How Much Should I Contribute to My 401(k)?
What Are the Pros and Cons of a Roth Conversion?
The pros of a Roth conversion are the same as why you’d consider contributing to a Roth account in the first place: It locks in your tax rate now on those funds, takes RMDs for Roth withdrawals off the table, and diversifies your accounts by tax treatment.
The cons are similar but even more restrictive. You won’t get an upfront tax break. You can’t withdraw any converted money—contributions nor earnings—for five years. Additionally, because of tax reform in 2017, once you initiate a Roth conversion, you can’t undo it. So, before you pull the trigger on converting tax-deferred funds to after-tax, consider whether this is a good decision for your long-term retirement planning.
Related: How to Max Out Your 401(k) + Other Retirement Accounts
How to Initiate a Roth Conversion
Converting funds to a Roth IRA entails rolling over funds from a pretax account like a traditional IRA into a Roth account (usually a Roth IRA, but on rare occasion, a Roth 401(k) or other vehicle). After you’ve funded your traditional IRA or employer-sponsored plan—such as a 401(k), 403(b), or 457(b)—and opened your Roth IRA, you can:
- Withdraw funds from your eligible retirement account by receiving a check and depositing it in your Roth IRA within 60 days.
- Engage in a trustee-to-trustee direct transfer from one account to another (if you’re rolling over your assets from one financial institution to another).
- If both accounts are with the same institution, you can ask for a specific amount to transfer from your qualified retirement account(s) to your Roth IRA; this is called a same-trustee or direct transfer.
The next (and usually most painful) step in the Roth conversion process is to pay taxes on your converted contributions and earnings.
Because you made contributions to qualified IRAs and employer-sponsored retirement plans, you claimed those deductions in the years you made those contributions. Now that you’ve converted those funds to be after-tax, you’ll owe taxes.
While this sounds simple, depending on how much money you’re converting to a Roth IRA, the tax burden could be substantial. And it can hit you all at once. In short, under normal circumstances (i.e., you’re a W-2 employee), your employer withholds taxes on your behalf each pay period. Thus, you only need to pay taxes (or receive a refund) once a year.
However, because your Roth conversion suddenly counts as receiving a considerable influx of income, you will need to pay those taxes before you file your annual tax return. The way to do that is through paying quarterly estimated taxes, much like self-employed and small business owners do. So, for instance, if you convert during the third quarter, your quarterly estimated taxes on the conversion will be due on (or around) Sept. 15 of that year. Unless your quarterly tax deadline would be April 15, don’t wait for the April 15 deadline to pay quarterly taxes, or else you could end up owing penalties and interest.
Related: Roth IRA for Kids: Can I Open a Custodial Roth IRA for a Child?
Is a Roth Conversion Right For You? Ask a Financial Professional
A Roth conversion can be a powerful tool for building wealth and adding flexibility to your retirement plan, but you should consider consulting with a qualified financial advisor before making a decision. They can help you assess your individual financial situation, determine if a Roth conversion is right for you, and explain the potential tax implications.
By working closely with a qualified financial professional, you can make informed decisions and maximize the benefits of a Roth conversion.
