What is a Roth IRA Conversion?

retirement

When it comes to saving for retirement, there are several types of accounts to which you can contribute to help achieve your goals. Each account has its own tax advantages and restrictions, but all are designed to reduce the impact of taxes while your savings grow during your working years.

However, only one type of retirement account allows for distributions that are entirely free from income tax: the Roth IRA. To benefit from this account, you need to contribute post-tax income to your Roth IRA or convert funds from a Traditional IRA.

What is a Roth IRA?

The Roth IRA is an Individual Retirement Account that allows you to contribute after-tax income up to $7,000 each year, or $8,000 if they are over 50 (as of 2025). Once contributions are made to the account, the investment earnings grow tax-free. All distributions taken after age 59½ can also be withdrawn tax-free. Importantly, there are no required minimum distributions (RMD) with a Roth IRA, making it a valuable tool for estate planning.

It's essential to note that the ability to contribute to a Roth IRA is limited based on annual income. If your income exceeds the limits for direct contributions, you might consider a backdoor Roth IRA. Be sure to check out my article on the Backdoor Roth IRA for more information (What is a Backdoor Roth IRA?)

What is Roth IRA Conversion?

A Roth IRA conversion involves transferring funds from your Traditional IRA to your Roth IRA. It's important to note that the amount you convert must be included in your taxable income for the year, as contributions to a Traditional IRA are typically made on a tax-deferred basis. This can make a Roth conversion challenging, as you may need a significant amount of cash outside your IRAs to cover the tax liability associated with the conversion. However, there are several advantages that make a Roth IRA conversion worthwhile.

Two Advantages of a Roth IRA Conversion

The first advantage of converting a Traditional IRA to a Roth IRA is that it can lower your tax rate during retirement. While you may accumulate a significant amount of savings in a Traditional account or through workplace plans, having a substantial portion of your retirement savings in a Roth IRA can help lower your effective tax rate in retirement. If you anticipate that taxes may rise in the future (and historical trends support this notion), establishing a portion of your savings in a Roth IRA is a smart strategy.

The second advantage of this conversion is the avoidance of required minimum distributions (RMDs). Once you reach the age of 72, you must start taking distributions from your Traditional IRA or workplace savings accounts. By converting to a Roth IRA, you can avoid this requirement, allowing for greater control over your savings. This freedom can be beneficial for estate planning and achieving your generosity goals.

How to Convert a Traditional IRA to a Roth IRA

Converting your Traditional IRA into a Roth IRA can be accomplished in four straightforward steps. Consider the following steps for a successful conversion:

Step 1: Open a Roth IRA

Start by opening a Roth IRA account with your preferred bank or brokerage. For convenience, you might want to open your account with the same brokerage where your Traditional IRA is held.

Step 2: Perform the Account Rollover

After establishing your Roth IRA, you can initiate the rollover process using the account information from your Traditional IRA. Keep in mind that the rollover process may take several weeks to complete, so be sure to monitor your accounts throughout the duration.

Step 3: Pay Your Income Tax

Since this rollover transaction will be reported to the IRS, you need to disclose it in your tax filings. The amount you convert will increase your taxable income, so it's important to pay the taxes due with available cash rather than using funds from within the IRA. This helps you maintain the benefits of the conversion.

Step 4: Seek Professional Help

If you're unsure about how to perform the conversion or the tax implications involved, consider seeking assistance from a Certified Kingdom Advisor (CKA). They can guide you through the process and ensure you navigate the transaction effectively.

Summary

While there are many types of retirement savings vehicles, the Roth IRA stands out due to its unique tax advantages, particularly the tax-free growth and withdrawals in retirement. Whether through direct contributions or strategic conversions from a Traditional IRA, utilizing a Roth IRA can be a powerful tool for building a secure financial future. By carefully considering the benefits of Roth conversions, including potential tax savings and the elimination of RMDs, and by following the outlined steps for a successful conversion, individuals can strategically position themselves for a comfortable and financially flexible retirement. Remember, consulting with a qualified financial advisor is always recommended to ensure the chosen strategy aligns with individual circumstances and long-term financial goals.