Consider a Roth IRA Conversion Before the End of the Year to Maximize Retirement Savings

An IRA is one of the most powerful retirement savings vehicles, or individual retirement account. Special personal savings accounts at these financial institutions allow you to deposit a certain amount of money each year, tax-free, and begin withdrawing it once you turn 59 and a half.

A Roth IRA, on the other hand, does the opposite and saves you taxes when you withdraw money from the account. A Traditional IRA allows you to contribute tax-free to a retirement account, while a Roth IRA exempts you from taxes on the distributions you receive from the account in retirement.

The good news is that you can convert funds from traditional IRAs and 401(k) accounts to a Roth IRA at any time. If you can afford the taxes and don’t need the money in the short term, converting a Roth IRA makes sense. For those who do not qualify for annual Roth IRA contributions, a Roth IRA conversion acts like a “backdoor” Roth IRA.

Learn all the important details about Roth IRA conversions to help you decide whether to consider rolling some of your retirement income into a Roth. For more information about retirement, learn all about Retirement Account Changes in 2025 or Average retirement savings balance by age.

How is a Roth IRA different from a traditional IRA?

this Roth IRA It was introduced with the Taxpayer Relief Act 1997.

Unlike a traditional IRA, contributions to a Roth IRA are not tax deductible. Instead, investors can withdraw funds from their accounts tax-free after reaching age 59 and a half, subject to some restrictions. In a traditional IRA, all distributions (including initial contributions and investment income earned therefrom) are taxed at current rates when they are received during your retirement.

A Roth IRA is more flexible with withdrawals than a traditional IRA. Roth IRA owners can withdraw their original contributions tax-free at any time, and you can withdraw investment earnings tax-free if you are age 59 and a half or older and the account has been open for five years.

Another benefit of Roth IRAs is that they are not subject to required minimum distribution When you reach a certain age, it’s like a traditional IRA.

What are the limitations of Roth IRA accounts?

Annual Contribution Limits for Traditional IRAs and Roth IRAs Same: $7,000 in 2024, or $8,000 if you’re 50 or older (these limits remain the same in 2025). As your income increases, the amount you can contribute to a Roth IRA gradually decreases.

Roth IRAs for single filers allow contributions that begin at $146,000 and are eliminated entirely at $161,000. For married taxpayers filing jointly, contributions phase out starting at $230,000 and disappearing at $240,000. Roth IRAs inherently do not apply to married people filing separate returns. Married people filing separate returns can only contribute to a Roth IRA if they earn less than $10,000 if they lived together during the year.

There are income limits for contributions to a Roth IRA, but there are no such limits for converting a traditional IRA to a Roth IRA. This means anyone at any income level can contribute to a Roth IRA by using the IRA conversion feature. This is why Roth IRA conversions are sometimes called “Backdoor Roth IRA“.

How to convert a traditional IRA to a Roth IRA?

There are several practical ways to convert an IRA to a Roth IRA, but the basic premise of all methods is similar – you transfer funds from an existing IRA account to a new Roth IRA account. You’ll then pay your current income tax rate on the funds you transfer, and you’ll receive tax-free distributions in retirement.

Converting an IRA to a Roth IRA is easier if both accounts are managed by the same financial institution, but this is not required. If the rollover requires a physical check to be mailed to you, you need to deposit the check into your Roth IRA account within 60 days to avoid penalties.

There’s no limit to the amount you can roll over from a traditional IRA to a Roth IRA in a year, but keep in mind that you’ll be taxed on it. If your pension will increase to higher tax bracket One year.

When you file your taxes, you will receive Form 5948 Shows the amount you rolled into a Roth IRA that you would report on your federal taxes using IRS Form 8606. Currently, there are no limits on the amount or number of times you can convert retirement funds to a Roth IRA.

important: As of 2018, you can no longer reverse a Roth IRA conversion. The IRS previously allowed “recharacterization,” or reversal, of Roth conversions until October 15 of the following year, but the 2017 Tax Cuts and Jobs Act ended that practice. Roth IRA conversions are now irrevocable, so be sure to consult a tax expert before converting your IRA to a Roth IRA.

Who should convert a Traditional IRA to a Roth IRA?

Everyone’s tax situation is unique, but there are two main requirements for people converting a traditional IRA to a Roth IRA:

• You won’t need to access your retirement funds for at least five years
• You can afford to pay the tax on the amount you exchanged

Yanelys Benham, Wealth Management Advisor TIAATell CNET that tax diversification should be a major factor when considering a Roth IRA conversion.

“In most cases, people save pre-tax through employer plans, which is a great way to start saving for retirement,” she said. “But if all your savings are pre-tax, then in retirement they will be taxed as ordinary income, which can be a tax time bomb.”

Benham also points out that the additional taxable income from traditional IRA distributions may increase the taxable amount of your Medicare Plan B premiums and Social Security benefits.

Social Security benefits are taxable at 0%, 50% and 80%. “Single taxpayers making more than $34,000 and joint filers making more than $44,000 will have 85 percent of their Social Security benefits taxable,” Benham told CNET.

Your Traditional IRA distributions are considered ordinary income, while your Roth IRA distributions are not. Converting your funds from a traditional IRA to a Roth IRA can allow you to enjoy a lower tax bracket during retirement and enjoy benefits such as potentially lower Plan B premiums.

Who shouldn’t convert a traditional IRA to a Roth IRA?

If you need your retirement savings soon, it doesn’t make much sense to convert your retirement savings to a Roth IRA. The bottom line is that, regardless of your age, there is a five-year waiting period for converting funds to a Roth IRA. If you withdraw any funds before the five-year threshold, you’ll pay a 10% penalty.

Additionally, much of the tax benefit of a Roth IRA relies on earning income over time, and paying taxes on the funds shortly before withdrawing them won’t save you much.

Another major factor when considering a Roth IRA conversion is whether you have the money to pay taxes on the converted funds. You don’t want to borrow money or dip into your IRA savings to pay the necessary income taxes. One popular strategy is to convert as much money as you can afford to pay taxes on that year to a Roth IRA.

Benham also stresses that it’s not a good idea to convert your traditional IRA to a Roth IRA if you plan to give most of your money to charity using qualified charitable distributions.

“People who plan to donate large amounts to charity and/or leave their IRAs to charity should not consider converting to a Roth account,” she said. “At age 70 and a half, you are eligible to make up to $100,000 per year Qualified charitable distributions are tax-free.”

The recipient must be a certified 501(c)(3) organization, and the IRA distribution must go directly from your financial institution to the charity.

The Roth IRA conversion calculator can help you calculate exactly how much tax a Roth IRA can save you. Bentham also emphasized that every investor should “consult your accountant and financial advisor when deciding whether converting an IRA to a Roth makes sense.”