Imagine a future where your retirement withdrawals are entirely tax-free. Sounds impossible, right? But hold on, it can be done (and simply) by converting your traditional IRA funds to a Roth IRA. That’s why Roth conversion benefits are quickly becoming a mainstay of effective wealth management.
It’s true that Roth conversions can potentially save you thousands of dollars in future taxes, but is it something that’s right for you?
In this article, I share everything you need to know about Roth conversion benefits. I break down traditional vs. Roth IRAs as well as the nuances of how taxes affect a Roth IRA.
Traditional vs. Roth IRA
A traditional IRA account offers front-end tax benefits. That means that qualifying individuals receive a tax benefit sooner rather than later because contributions to the retirement account are made with pre-tax earned income.
Depending on your salary and whether you or your spouse are enrolled in a work-sponsored retirement plan, the contributions you made during the previous year may be fully or partially deductible at tax time.
Here’s a summary of the guidelines categorized by tax filing status:
Single: For people with adjusted gross incomes (AGIs) between $79,000 and $89,000 who are enrolled in a workplace retirement plan, the tax deduction fades out.
Single: If the taxpayer is unmarried and not enrolled in an employment retirement plan, they can claim the tax deduction for any amount of their AGI.
Married: When a spouse contributes to a regular IRA through a work retirement plan, the tax deduction increases from $126,000 to $146,000.
A traditional IRA’s maximum annual contribution for 2025 is $7,000 (or $8,000 for individuals over 50). Additionally, a traditional IRA carries a required minimum distribution (RMD), which starts on April 1 after your 73rd birthday. (Note: In 2033, the RMD age increases to 75 per the SECURE 2.0 Act.) You incur a significant penalty fee if you ignore the RMD.
On the other hand, when you’re ready to withdraw funds, a Roth IRA provides a future tax benefit. That’s because contributions to a Roth IRA are made with money you have earned after taxes from your job. You won’t be subject to additional taxes on either the original investment or the earnings when it comes time to cash in.
Also unlike a traditional IRA, a Roth IRA does not have any RMDs. Contributions can also be taken out whenever you like, but in order to avoid paying a 10% penalty, you should not take out any earnings until you reach age 59½.
Roth Conversion Benefits and Taxes
As mentioned, a Roth IRA conversion is the process of converting tax-deferred assets from a traditional IRA into a Roth IRA account.
Essentially, when you convert your pre-tax retirement funds to a Roth IRA, you are choosing the tax-free future benefits of a Roth IRA over paying taxes now on pre-tax retirement funds.
But how is that decided? An easy approach is to start by thinking about your current tax bracket and if the conversion keeps you in the same bracket or moves you up to a higher bracket. Then think about your possible bracket at and during retirement.
If your current tax bracket is substantially lower than the future one, a conversion may make sense. If it’s not lower or the brackets are equal, a conversion may not be advisable. A Roth conversion might be right for you if you currently have a traditional IRA but anticipate being in a higher tax bracket when you’re ready to withdraw funds.
Partner With a Professional
Most Roth conversions affect multiple areas of your financial strategy, including taxes, retirement planning, wealth management, and estate planning. So partnering with an experienced financial professional could prove extremely beneficial.
Our team at Premier Planning Group can walk you through each step of the process and help you determine whether a Roth conversion is right for you.
Call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation. We look forward to hearing from you!
Cetera Advisor Networks LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.