Looking for ways to potentially reduce taxes in retirement?
A Roth conversion might be worth considering. By paying taxes now on funds in a traditional IRA or 401(k) and moving them into a Roth account, you can set yourself up for tax-free growth down the road.
Wondering if a Roth conversion fits into your financial plan? At Anderson Financial Strategies, we focus on giving you clear, personalized guidance so you can make informed decisions that match your goals and circumstances.
We’ll walk you through how a Roth differs from a traditional IRA, explain what a conversion entails, and help determine if it could be a strategic move for your retirement savings.
Traditional vs. Roth IRA
A traditional IRA provides a tax benefit on the front end, meaning qualifying individuals enjoy a benefit sooner rather than later. Contributions are made with pre-tax earned income. At tax time, the contributions made over the last year are fully or partially tax-deductible based on income and whether you or your spouse are participating in a work-sponsored retirement plan.
Here’s a breakdown based on tax filing status:
- Single: The tax deduction phases out for those who are covered by a workplace retirement plan and have an adjusted gross income ranging from $79,000 to $89,000.
- Single: The tax deduction is available for any amount of AGI if the taxpayer is single and not covered by a workplace retirement plan.
- Married: The tax deduction phases from $126,000 to $146,000 for the spouse making traditional IRA contributions with a work retirement plan.
The 2025 max annual contributions into a traditional IRA is $7,000 (or $8,000 for those over 50). A traditional IRA also comes with a required minimum distribution (RMD), beginning April 1 after your 73rd birthday. (Note: Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) Ignoring the RMD will land you a hefty penalty fee.
Conversely, a Roth IRA provides a future tax benefit, once you’re ready to withdraw the funds. Roth IRA contributions are made with after-tax money you’ve earned through work. When it’s time to cash in, you will not be assessed any further taxes on the initial investment or the gains.
Unlike a traditional IRA, there are no RMDs associated with a Roth IRA. You may also withdraw contributions at any time, but be careful to not withdraw any of the gains before you’re 59½ years of age to avoid a 10% penalty fee.
Roth IRA Conversion and Taxes
A Roth IRA conversion is a tax strategy that normally involves converting tax-deferred savings (IRA, 401(k)) into a tax-free retirement account. In the case of a Roth IRA conversion, you’re ultimately deciding the future tax-free benefits of a Roth IRA are superior to paying the taxes now on pre-tax retirement money.
But how is that determined? A simplistic method may be to first consider your present tax bracket and whether you remain in this bracket (or ascend to a higher bracket) with the conversion. Then consider your potential bracket at and during retirement. If the current bracket is significantly lower than the future one, a conversion may make sense. If not or the brackets are equal, a conversion may not be advisable.
Exploring Roth IRA Conversion Opportunities
If you currently hold a traditional IRA but expect to be in a higher tax bracket when you begin withdrawals, a Roth conversion may be worth considering.
Roth conversions can influence multiple aspects of your overall financial plan, including tax strategy, retirement income, investment allocation, and estate planning. Navigating these implications is complex, which is why working with seasoned wealth managers can make a meaningful difference.
At Anderson Financial Strategies, we guide high-net-worth clients through every step of the Roth conversion process, helping determine if it aligns with your financial goals and long-term strategy. Ready to take the first step toward a more tax-efficient retirement? Schedule a complimentary consultation today by calling us at 855-237-4545.
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 20 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER® practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as president of the CFA Society Dayton as well as on the boards of the Miami Valley Hospital Foundation and Wright State’s planned giving council, and was appointed as a Trustee for Central State University. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dogs, Biscuit and Ella. To learn more about Shon, connect with him on LinkedIn.