Savers may convert all or part of a Traditional IRA to a Roth IRA. While the converted amount is taxed as ordinary income, future withdrawals from the Roth account are tax-free, assuming IRS requirements are met.
Why Consider a Roth Conversion?
- Helps reduce future required minimum distributions (RMDs)
- Prevents increased Medicare premiums tied to taxable income
- May benefit those expecting higher tax rates in retirement
Advanced Roth Strategies
This two-step strategy enables high earners to fund a Roth IRA indirectly by making a non-deductible Traditional IRA contribution and then converting it. Caution is advised for those with existing pre-tax IRA balances due to the pro-rata rule, which can trigger unexpected taxes.
Mega Backdoor Roth 401(k) Conversions
Some employer plans allow employees to make after-tax contributions to a 401(k) and immediately convert them to a Roth 401(k), minimizing tax exposure. In certain plans, these conversions can be automated with each payroll cycle.
For more detailed guidance, refer to IRS Publications 560 and 590-A.
Withdrawals: Rules, Penalties, and Exceptions
Required Minimum Distributions (RMDs)
RMDs from Traditional IRAs and employer plans begin in the year the account holder turns age 73
First RMD can be delayed until April 1 of the following year, but this would require two distributions in one calendar year
If the account holder is still working and owns less than 5% of the employer’s company, RMDs may be deferred
Roth Accounts
Roth IRAs have no RMDs for original owners or spouses who inherit and roll them into their own Roth IRA
Roth 401(k)s are also exempt from RMDs for original owners beginning in 2024
Early Withdrawals and Loans
Withdrawals before age 59½ are generally subject to ordinary income tax and a 10% early withdrawal penalty, unless an exception applies.
Penalty Exceptions May Include:
Certain medical or education expenses
First-time home purchases
Disability or substantially equal periodic payments
Roth IRAs: Contributions (not earnings) may be withdrawn at any time without taxes or penalties. Once the account has been open for at least five years and the owner is 59½ or older, all withdrawals are tax- and penalty-free.