Is a Roth Conversion Right for You?

Have you ever wondered if a Roth conversion is right for you? There are many factors in deciding whether a Roth conversion is the correct move for your situation. Typically, the decision is driven by tax implications. No one wants to pay more taxes than they have to and balancing that with preparing for retirement can be a tricky situation. This blog will help lay out some of the factors that contribute to making a Roth conversion and will provide you with a clearer picture of what options are out there for your retirement planning needs.

First, let’s start with the difference between a Roth IRA and a Traditional IRA. Contributions to a Roth IRA are made with after-tax dollars and then withdrawn tax-free (some restrictions apply). A Traditional IRA is the opposite. Contributions are made with pretax dollars and then taxed when withdrawn.

Simply put, a Roth conversion is moving money and changing the classification of the money from a Traditional IRA to a Roth IRA. Why would you consider doing this? Because not everyone can contribute directly to a Roth IRA.

Many individuals can’t make contributions to their Roth IRAs because of the amount of income they earn each year. To determine if an individual is eligible to contribute to a Roth IRA we use something called modified adjusted gross income or MAGI. If you’re married and filing your taxes jointly and you make more than $208,000 you cannot contribute directly to a Roth IRA. If you are single and filing your taxes as the head of household and make more than $140,000 a year you also can not contribute to a Roth IRA. So, what can you do? That’s where a Roth conversion or a back door Roth comes into play.

Any investor who is not already eligible for a Roth contribution because of their MAGI can now do a Roth conversion or backdoor Roth contribution. There are no income limits for conversions. In 2010 the federal government began allowing anyone to convert their Traditional IRA money to a Roth IRA regardless of their income. Thus began the implementation of Roth conversions and backdoor Roths. More recently, Congress is looking to make changes to this rule which may eliminate this option altogether. Although it’s allowed for everyone right now, it is not appropriate for all.

What are some pros and cons to doing a Roth conversion?

  1. Contributions made to a Roth IRA and earnings from those contributions grow tax-free.
  2. If for some reason you needed to withdrawal those contributions you could at any time, for any reason, tax-free (some restrictions apply).
  3. Roth IRAs are not subject to required minimum distributions (RMD) like Traditional IRAs are. Once you reach 72 years of age you are required to take money out of your traditional IRA each year, but a Roth is not subject to those regulations. Therefore, you can leave your money in your Roth to continue to grow tax-free.
  1. When you do a Roth conversion you will have to pay tax on it and that could be a substantial amount. Calculating the taxes can also be complicated if you have other IRAs such as a traditional, SEP, or SIMPLE that you aren’t converting.
  2. A Roth conversion may not be beneficial to you because you could have a lower tax rate in the future.
  3. Once you do a Roth conversion you have to wait 5 years to take tax-free withdrawals even if you are already 59 ½.

There is a difference between a backdoor Roth and a Roth conversion, and they have contrasting purposes. A backdoor Roth is when you contribute to your Traditional IRA the maximum allowable amount, which in 2021 for those under 50 years old is $6,000 and those over 50 is $7,000. And then immediately in that same tax year, you move that contribution to your Roth IRA. Thus, a backdoor way of contributing to your Roth IRA. A Roth conversion is when you take an amount that has already been contributed to your Traditional IRA over multiple years and move that to your Roth IRA. There are no limits on the amount for a conversion like there is for a backdoor Roth. You would have to pay taxes on the amounts in both instances. So, Roth conversions take more thought and strategy because they are usually much larger amounts and have higher tax implications.

How do you do a backdoor Roth or Roth conversion?

A backdoor Roth IRA can be done in a three-step process. First, you must have two IRAs opened at a custodian. A Traditional IRA and a Roth IRA. Second, you make a non-deductible cash contribution to your Traditional IRA. Make the maximum contribution according to your age into the Traditional IRA, but do not invest that cash. Third, once the cash settles in your IRA (usually three business days depending on the custodian) you can execute a backdoor Roth conversion from the IRA to the Roth IRA by filling out the appropriate paperwork at the custodian. Once the money is in the Roth, the ‘backdoor’ has officially been executed. You can now invest in the Roth for the long-term. This strategy is allowed because you made the contribution to the Traditional IRA first, then simply converted the non-deductible Traditional IRA contribution by moving it to the Roth IRA.  The process is relatively the same for making a Roth conversion. The main difference is that you wouldn’t make a contribution to a Traditional IRA to start. The money would already be in your Traditional IRA and then you just simply move the determined lump sum to your Roth.

Regardless, if you are wanting to perform either a Roth conversion or a backdoor Roth, it is recommended to consult your trusted advisor or tax professional to determine which if any aligns with your financial situation. Here at BerganKDV, our advisors work hand and hand with our tax professionals to ensure that our client’s unique financial needs are being met. Schedule an introductory call with one of our advisors and further discuss how we can help you accomplish your financial goals.


The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.

CATEGORIES: Wealth Management
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