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Roth IRAs are a valuable tool for savers, but they remain underused. As of 2024, only 26% of U.S. households owned one.
However, among those households, 65% said they have a defined strategy for managing income and assets in retirement.
That suggests those who embrace Roth strategies often do so within a broader, disciplined plan.
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Roth conversions can be a useful part of that plan, but they shouldn’t be considered lightly. Before initiating a conversion, you should take a holistic view of your finances, work with your adviser and make sure you’re well informed about the implications.
Why convert to a Roth IRA?
Roth IRAs offer tax-free growth after age 59½ and a holding period of five years, which can increase your net income in retirement and help you build a stronger legacy for your loved ones.
Shifting some of your pretax retirement assets into a Roth can lower future required minimum distributions (RMDs), thereby reducing taxable income. And under the SECURE Act’s 10-year rule for most non-spouse beneficiaries, inheriting a Roth is more beneficial than inheriting a traditional IRA.
Because of the 10-year rule, it’s advisable for beneficiaries to spread withdrawals over the decade from an inherited pretax retirement account to avoid a huge tax bill in the final year.
While an inherited Roth is also subject to this rule, RMDs are not required until the last year, and that final withdrawal is tax-free. This flexibility allows beneficiaries to invest more aggressively in an inherited Roth than in an inherited traditional IRA.
If markets are down in the 10th year, beneficiaries can also make an in-kind distribution to a taxable account, without triggering additional taxes.
Planning around taxes and timing
Of course, there are trade-offs. Taxes are owed on each Roth conversion, which increases adjusted gross income (AGI) for that year. The five-year rule also applies separately to each conversion, unlike a contributory Roth IRA.
To maximize the benefit, taxes should ideally be paid from after-tax funds. Those without sufficient after-tax liquidity may not be good candidates for a Roth conversion.
Managing brackets and hidden costs
A Roth conversion may push you into a higher tax bracket, particularly at jumps like 12% to 22%, or 24% to 32%.
To limit that impact, consider converting only enough to stay within your existing bracket. The 24% bracket is especially broad, allowing for larger conversions without higher rates.
Additionally, single filers face higher brackets than joint filers. (A conversion opportunity may therefore arise after a spouse’s passing, while the surviving spouse can still file jointly.)
Other potential drawbacks include higher Medicare Parts B and D premiums owing to the income-related monthly adjustment amount (IRMAA), which is based on modified adjusted gross income (MAGI).
For retirees, MAGI is usually slightly higher than AGI because it adds back certain items, such as the non-taxable portion of Social Security benefits and municipal bond interest.
State and local tax rules can also present challenges. In New Jersey, for instance, retirees with incomes below certain levels qualify for pension exclusions and property tax benefits, both of which could be affected by higher reported income from a Roth conversion.
Similarly, New York offers a $20,000 exemption per taxpayer on private pretax retirement income, on top of a full exemption on public pension income, allowing couples to convert up to $40,000 without state tax.
Finally, high-income earners should be aware of the phase-down of the State and Local Tax (SALT) deduction, which further limits the ability to offset federal taxes. This change can reduce the overall benefit of large conversions for those already near SALT deduction caps.
Advanced conversion strategies
For those with a high income and ineligibility for direct Roth contributions, a “backdoor” Roth strategy may be an option, making non-deductible traditional IRA contributions, and then immediately converting to a Roth.
In addition to the 59½ and five-year rules, the pro-rata rule must also be considered. Taxes on the conversion depend not only on the converted amount but on the total pretax IRA balance. This includes traditional, SEP and SIMPLE IRAs, but not 401(k)s.
Those with large existing traditional IRA balances may not be ideal candidates for a backdoor Roth IRA, whereas those with a large 401(k) and no other pretax IRA assets may benefit more.
Even among plans that allow Roth conversions, adoption remains limited: Only 32% of plan administrators said some of their plans permit Roth conversions, and 26% said most did.
That gap underscores how underused these strategies remain, even as tax diversification becomes more valuable. There are two distinct backdoor Roth strategies:
- The IRA backdoor Roth, which involves contributing to a non-deductible traditional IRA and then converting to a Roth.
- The 401(k) or plan-based backdoor Roth, available only if an employer plan permits in-plan Roth conversions or allows after-tax contributions that can later be rolled over. Note this can only be done once the elective deferral limit is reached and permitted up to the annual additions limit, which includes all elective deferrals, employer contributions, and after-tax contributions.
While after-tax contributions can be rolled over to a Roth IRA, any growth on them is still considered pretax, unless immediately converted.
If the conversion feature becomes available only after significant after-tax growth has accumulated, participants should consider rolling over contributions to a Roth IRA and the growth on them to a traditional IRA before converting, to minimize taxes.
This approach helps avoid taxes on the initial conversion and ensures a clean starting point. Opening a Roth IRA early also starts the five-year clock on tax-free growth sooner, avoiding delays when future rollovers occur.
If you are phased out of a contributory Roth conversion and worried about the pro-rata rule, consider a small one-time backdoor Roth IRA contribution.
The bottom line
A Roth conversion isn’t right for everyone, but when done thoughtfully, it can be a powerful way to enhance retirement income, reduce future taxes and gain more control over your financial future.
The right strategy depends on your income, time horizon and ability to pay the upfront tax bill without dipping into retirement savings.
When approached carefully, with a clear understanding of how it fits into your broader goals, a Roth conversion can provide lasting benefits: flexibility in retirement, protection against rising tax rates and a more tax-efficient legacy for your heirs.
Make sure to talk to a qualified financial adviser who can help you evaluate your options and make the right decision for your personal situation.