When planning for retirement, Roth accounts often emerge as a powerful tool. They offer tax-free growth and tax-free withdrawals in retirement. However, not all Roth strategies are created equal. By understanding the nuances of Roth Contributions and Roth Conversions, you can optimize your retirement savings strategy and potentially unlock significant tax benefits.

What is a Roth Contribution

A Roth contribution is a powerful tool for retirement savings, allowing you to invest after-tax dollars and potentially withdraw your earnings tax-free in retirement. To make a Roth contribution, you must have earned income, such as wages, salary, or self-employment income. There are income limits for Roth IRA contributions, which vary based on your filing status.

For single filers in 2024, the phase-out range for Roth IRA contributions is between $146,000 and $161,000. This means that if your modified adjusted gross income (MAGI) is below $146,000, you can contribute the full $7,000 ($8,000 if age 50 or older). If your MAGI is above $161,000, you cannot contribute to a Roth IRA. For married couples filing jointly, the phase-out begins at $230,000 and ends at $240,000.

Roth 401(k) contributions have no income limits, but there is a maximum amount you can contribute to all of your retirement accounts combined, including your Roth 401(k), traditional 401(k), and other employer-sponsored retirement plans. This limit is set by the IRS each year. While you must have earned income to contribute, the funds can come from savings or other investment accounts.

What is a Roth Conversion

A Roth conversion involves moving funds from a traditional IRA or 401(k) to a Roth IRA. Unlike Roth contributions, Roth conversions have no income limits, meaning anyone can perform a conversion regardless of their income level. However, it’s important to note that a Roth conversion is a taxable event, meaning you’ll owe income tax on the amount you convert in the year of the conversion. The funds you convert must come from a pre-tax retirement account, such as a traditional IRA or 401(k), or from non-deductible IRA contributions.

When should you consider doing a Roth Conversion

You may want to consider a Roth conversion if you’re in a low-income year to minimize the tax impact, if you want to reduce future Required Minimum Distributions (RMDs) from traditional accounts, or if you want to diversify your retirement income sources by having both taxable and tax-free income.

Ultimately, the decision between a Roth contribution and a Roth conversion is a personal one. While both strategies offer tax advantages, they have distinct implications for your financial future. Consider your current tax bracket, anticipated future income, and long-term goals when making your choice. A Roth contribution can provide tax-free growth and withdrawals in retirement, while a Roth conversion offers immediate tax benefits and potential flexibility. To make the best decision for your specific circumstances, consulting with a qualified financial advisor is highly recommended.