What is a Roth IRA conversion?
A Roth IRA conversion involves moving funds from a Traditional IRA (or other pre-tax retirement account) into a Roth IRA. You pay income taxes on the converted amount in the year of conversion, but future growth and qualified withdrawals from the Roth IRA are completely tax-free. See also our RMD Calculator.
Is a Roth IRA conversion right for me?
A conversion tends to benefit you most if you expect to be in a higher tax bracket in retirement than you are today, if you have many years for the account to grow tax-free, or if you want to avoid Required Minimum Distributions (RMDs). Your personal situation, including current income, tax bracket, and financial goals, should guide the decision.
How are taxes calculated on a Roth IRA conversion?
The converted amount is added to your ordinary taxable income for the year of conversion and taxed at your marginal federal (and state) income tax rate. For example, converting $50,000 in a 22% federal bracket plus a 5% state rate would trigger approximately $13,500 in taxes. Paying those taxes from outside savings rather than the IRA itself maximizes the long-term benefit.
What is the break-even point for a Roth conversion?
The break-even point is the number of years it takes for the tax-free growth of the Roth IRA to offset the upfront tax cost of converting. If you live and invest beyond the break-even point, the Roth conversion will have been financially advantageous. You might also find our IRA Calculator useful.
Can I convert only part of my Traditional IRA?
Yes. You can convert any portion of your Traditional IRA to a Roth IRA. Partial conversions are a common strategy to manage the tax impact — for example, converting just enough each year to stay within a certain tax bracket.
Are there income limits for Roth IRA conversions?
No. Unlike direct Roth IRA contributions, there are no income limits on conversions. Anyone with a Traditional IRA can convert to a Roth, regardless of income. This is sometimes referred to as a 'backdoor Roth IRA' strategy for high earners.
What happens if I take money from my IRA to pay the conversion taxes?
If you pay conversion taxes from the IRA funds themselves, you reduce the amount that gets converted and grows tax-free in the Roth account. This significantly diminishes the long-term benefit. Financial professionals generally recommend using outside (non-retirement) funds to pay the taxes whenever possible.
Do I have to convert my entire Traditional IRA at once?
No. You can spread conversions across multiple years, which can help you manage your tax liability. For example, converting smaller amounts over several years can keep you from being pushed into a higher tax bracket in any single year.