Roth Conversions: The Beginner’s Guide
What Makes a Roth IRA So Attractive?
The unique tax treatment of Roth IRAs offers a compelling opportunity for many investors. While income limits may prevent higher earners from contributing directly, Roth conversions provide a way to shift pre-tax assets—taxed at ordinary income rates—into tax-free accounts. The benefits can include income tax savings, reduced required minimum distributions (RMDs), and greater flexibility in legacy planning.
Roth IRAs: A Refresher
Established under the Taxpayer Relief Act of 1997, Roth IRAs allow investors to grow assets tax-free over the long term. Withdrawals are also tax-free once the account holder is at least age 59½ and the account has been open for five years. By contrast, withdrawals from traditional IRAs are taxed as ordinary income.
Eligibility for direct contributions depends on income:
- Single filers (2025): Full contribution ($7,000 if under age 50; $8,000 if 50+) permitted if modified adjusted gross income (MAGI) is below $150,000; phased out entirely at $165,000.
- Married joint filers (2025): Full contribution allowed if MAGI is below $236,000; phased out entirely at $246,000.
Other features that add to Roth IRA appeal include:
- No required minimum distributions (RMDs).
- The ability to contribute after age 70½ if still working—unlike traditional IRAs—allowing even more time for tax-free growth.
Roth IRAs also provide significant estate planning advantages. Because withdrawals are tax-free, heirs typically owe no income tax on inherited balances. For this reason, we often encourage clients to use other accounts for retirement spending before tapping Roth assets.
Converting Traditional IRAs to Roth IRAs: Key Considerations
Traditional IRAs, which offer tax-deferred (but not tax-free) growth, can be converted to Roth IRAs. Conversions effectively transform before-tax dollars into after-tax dollars, and there are no limits on how much you can convert. Before pursuing a conversion, consider:
- Your current and future tax brackets: If you expect to be in a higher bracket later, converting while in a lower bracket can be advantageous. The amount converted counts as taxable income in the year of conversion.
- Time horizon for growth: Ideally, you’ll want at least five to ten years for the Roth IRA to build a meaningful tax-free balance.
- Your ability to pay taxes upfront: Conversions work best if you can pay the associated tax bill using funds outside the IRA. Strategically timing a conversion for years when your income is lower may further enhance the benefit.
Conversions Aren’t for Everyone
While Roth conversions and backdoor contributions can be powerful tools, they aren’t always the right choice. The best approach depends on your personal tax situation, retirement goals, and legacy planning priorities. Your Truepoint advisor can help you determine whether a Roth strategy makes sense for you.
Below we’ve provided a decision tree to help you better understand if a conversion is the right fit for you:
