What Is a Roth IRA Conversion?

A Roth IRA offers enormous advantages like tax-free income and the option to leave tax-free money to heirs, making it the best retirement plan available, in the opinion of many experts. Additionally, you have more freedom to withdraw retirement funds from a Roth IRA due to its tax-free status.

It entails transferring retirement assets from a standard, simplified employee pension (SEP), SIMPLE IRA, or a defined-contribution plan like a 401(k) to a Roth IRA. While the account owner must pay income tax on the funds converted, they can make tax-free withdrawals from the account in the future.

A Roth IRA can be helpful l if you intend to leave an estate. A Roth IRA can also be passed to heirs, who benefit from significant tax savings. You can open a Roth IRA at any age if you have enough earned income to fund the contribution.

The Roth IRA also provides a great deal of flexibility. There are no mandated minimum distributions, like in a typical IRA. Plus, you can withdraw contributions (but not earnings) without penalty. You may face taxes and a 10% bonus penalty if you withdraw earnings too early. However, in rare cases, you can withdraw funds without penalties.

Who Can Contribute to a Roth IRA? 

If you are under 50, your maximum Roth IRA contribution 2024 is $7,000 (up from $6,500 in 2023). If you're 50 or older, you can make another $1,000 per year in "catch-up" contributions, giving your total contribution to $8,000. The catch-up contribution was also $1,000 in 2023.

How much you can contribute will vary according to your income. To contribute the maximum amount in 2024, your modified adjusted gross income (MAGI) must be less than $146,000 (up from $138,000 last year) if single or between $230,000 and $240,000 (up from $218,000 to $228,000 last year) if married and filing jointly. 

There is no minimum age to join a Roth IRA, and you can also contribute to another person's  account as a gift, which is ideal for parents who want to start their child's retirement savings. 

For whom is a Roth IRA conversion a good idea?

Financial experts often recommend Roths for persons who expect to pay a higher tax burden in retirement, whether due to growing income or higher tax rates overall. Paying taxes on those contributions while your income or tax rate is lower allows you to benefit from tax-free money later when it is more valuable. This is especially true for those who want to retire by 2026. 

You believe that your tax bracket will be higher in retirement.

In this case, paying your current tax rate is preferable to paying a higher one once you cease working. Paying more outstanding taxes in retirement may seem unlikely, but it is conceivable, especially if you haven'thave yet to reach your peak earning years or have considerable funds in your retirement accounts. It may be more advantageous to convert all or a portion of money in a regular IRA to a Roth now rather than later.

You Have Higher Earnings 

For those who earn too much to qualify for a Roth IRA through traditional means, a Roth conversion may be a viable choice. Individuals initially contribute to a nondeductible IRA, which is then converted into a Roth IRA - this is known as the "backdoor Roth IRA approach."

Tax treatment does not diversify your accounts.

That is, the majority of your assets are in tax-deferred accounts. By converting to a Roth IRA, you will have assets not taxed when withdrawn, allowing you to manage your tax brackets better and engage in more tailored tax planning during retirement.

You'll pay higher tax rates later.

There is also a general rule for determining when a conversion is helpful. It would be more advantageous if you were in a lower income tax bracket than you expect to be when you make withdrawals.

You could be in a higher tax bracket for various reasons, including living in a state with income taxes, earning more later in your career, or paying higher federal tax rates later.

A Roth IRA offers tax-free growth and withdrawals in retirement. If you are not able to contribute to a Roth IRA due to income restrictions, a Roth conversion of qualifying retirement assets is an alternative way to finance your Roth account. However, does it make sense if you are retired or intend to retire soon? Maybe. A Roth IRA, even if converted, has the potential to enhance your retirement and estate planning.