T. Rowe Price Personal Investor - Can You Save Money by Converting Assets to a Roth IRA? (2024)

¹It may also be possible to convert assets from pretax to Roth within a retirement plan such as a 401(k) plan. While many of the planning principles are the same, this paper focuses on conversions of IRAs.
²A qualified distribution is tax-free if taken at least 5 years after the year of your first Roth contribution AND you’ve reached age 59½, become totally disabled, or died or you meet the requirements for a first-time home purchase. If the distribution from your Roth IRA is not qualified, the earnings may be taxable. Additional taxes may apply for early withdrawals.
³This analysis builds upon T.RowePrice’s February 2015 paper by Judith Ward, CFP^®, “How to Minimize Unwanted RMDs Using a Roth IRA Conversion Strategy.”
⁴Assumptions for all cases: A married couple has an annual taxable income of $225,000 and is in the 24% federal tax bracket. The income level is such that Roth conversions ($40,000 annually during the relevant years) do not change their federal tax bracket. State income taxes are not considered. (This approximately reflects the state tax rate not changing from working years to retirement.) The couple has $500,000 saved in Traditional IRAs that they do not expect to need for retirement income. The fact that they have other income sources is important, but the analysis does not need to reflect those assets or cash flow streams. One spouse contributes $8,000 annually to a Traditional IRA from age 55 until age 65. The couple also has $130,000 in a taxable account that can be used to pay taxes on the Roth conversion (using assets without gains, so there is no additional tax due to liquidation). This account will also be used to invest RMDs from the Traditional IRAs (since RMDs are not needed for retirement spending). All accounts have 6% annual investment returns, before taxes. All capital gains are taxed at the 15% rate. RMDs are assumed to be taxed at the marginal rate (not across multiple tax brackets), which stays steady through retirement. RMDs are based on rules in effect on January 2, 2024, including a beginning age of 75 for people who are currently 55.
⁵Kutner, George W., Doney, Lloyd D., Trebby, James P., “Investment Performance Comparison Between Roth And Traditional Individual Retirement Accounts,” Journal of Applied Business Research (JABR), [S.l.], v. 17, n. 1, Feb. 2001. ISSN 2157-8834. Available at: cluteinstitute.com/ojs/index.php/JABR/article/view/2064.
⁶This analysis assumes the taxable account generates only earnings at 0% or capital gains rates, not at ordinary rates. (This reflects a person who carefully manages assets across account types.) It also assumes the heirs’ tax rate is the same as the person’s tax rate during retirement. Starting amounts in the accounts, as well as the amount of annual conversions, are adjusted proportionally based on approximate income levels for the starting tax brackets. The analysis is based on starting conversions at age 55. Other assumptions are consistent with the analysis summarized in Figure 1.

Important Information

FAQs

Can you save money by converting assets to a Roth IRA? ›

Can You Save Money by Converting Assets to a Roth IRA? This strategy could reduce your taxes over the long term. Having tax-free Roth assets can provide you with freedom to use that money to pay for expenses in retirement, such as a new roof or a special vacation, without increasing your annual taxable income.

Do you have to pay taxes immediately on a Roth conversion? ›

Taxes aren't due until the tax deadline of the following year, so you may have more than 15 months to pay the taxes on your converted balances. (Note: If you pay estimated taxes, you may need to make some payments sooner.)

Tell Me More ›

Can you do Roth conversions after age 72? ›

You can convert an IRA to a Roth no matter how old you are. But if the conversion boosts your income, it could have taxing consequences. You can't contribute to a traditional IRA, at any age, if you don't have earned income.

Read On ›

What is the Roth conversion loophole? ›

A backdoor Roth can be created by first contributing to a traditional IRA and then immediately converting it to a Roth IRA to avoid paying taxes on any earnings or having earnings that put you over the contribution limit.

Find Out More ›

How do I avoid 10% penalty on a Roth conversion? ›

This is because a five-year waiting period is required if you are under age 59 1/2 before you can distribute the converted amount without owing the 10% additional tax.

Keep Reading ›

What is the 10 penalty on Roth conversions? ›

You will owe taxes on the money you convert, but you'll be able to take tax-free withdrawals from the Roth IRA in the future. Be aware that withdrawing converted funds within five years of the conversion will trigger a 10% penalty.

Explore More ›

Should I move my savings to a Roth IRA? ›

The biggest advantage of a Roth IRA is that if you follow the rules, you won't pay taxes when you take distributions. In addition, Roth owners aren't subject to RMDs at age 73 as owners of traditional IRAs or traditional 401(k) accounts are.

Read The Full Story ›

Should I convert everything to Roth? ›

In its simplest form, the decision in favor or against a Roth Conversion can be boiled down to one question: Are you paying a lower tax rate now than you will be in retirement? If yes, there's a good chance that conversions make sense. If not, a conversion likely does not make sense.

Learn More ›