Koji Watanabe, CFP®
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Key Takeaways
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Roth conversions offer high earners an avenue to leverage the advantages of Roth individual retirement accounts (IRAs), even if their income exceeds the IRS limits to make a direct contribution to the account. The term “Roth conversion” simply refers to the process of moving funds from a tax-deferred retirement account like a traditional IRA into a Roth IRA. Unlike making a direct contribution to a Roth IRA, you may be able to use a Roth conversion to benefit from tax-free withdrawals in retirement, reduce or eliminate required minimum distributions, and take advantage of the tax and estate planning opportunities that Roth IRAs may provide.
Why might a Roth conversion be a useful strategy for high-income earners?
Roth IRAs are subject to income limits that prevent high earners from making direct contributions to the account. In 2025, single filers with a modified adjusted gross income (MAGI) over $165,000 and married couples filing jointly with income over $246,000 are ineligible to make direct contributions to a Roth IRA. However, high earners may still fund a Roth IRA by converting assets in a traditional IRA, 401(k), or other tax-deferred retirement accounts to a Roth IRA.
Holding assets in a Roth IRA offers two distinct advantages over traditional IRAs. The first benefit of a Roth IRA is the ability to make qualified distributions from the account without having to pay taxes on your withdrawal.1 In contrast, when you withdraw funds from a traditional IRA, the distribution will be subject to federal income taxes. Some states also impose taxes on distributions from traditional IRAs based on their individual state tax laws.
The second important difference between Roth IRAs and traditional IRAs is that traditional IRAs are subject to annual required minimum distributions (RMDs) while Roth IRAs are not subject to RMDs. Because Roth IRAs avoid RMDs, account owners may have greater flexibility over withdrawals and the potential for continued tax-free growth of invested assets. In contrast, RMD requirements for traditional IRAs require account holders to withdraw a certain amount each year when they turn 73 years old (75 years old for those born 1960 or later). Failing to withdraw your RMD from a traditional IRA may lead to a 25% excise tax on the amount that should have been withdrawn.
Tax implications of Roth conversions
Roth conversions increase your adjusted gross income (AGI) in the year converted, which will result in taxes due for the year of conversion and can push you into a higher tax bracket. Rather than converting a fixed amount each year or attempting to convert all funds at once, Roth conversions may require ongoing evaluation to manage your income tax liability or cash flow needs. Consider consulting your private wealth management team toward the end of each year when you have a clearer understanding of your annual income to assess how much to convert.
How Roth conversions enhance income tax planning
Roth conversions may offer high earners more flexibility and control when tax planning. Holding your assets in a mix of tax-deferred, tax-free, and taxable accounts promotes balance sheet diversification, giving you more options to manage taxes and strategically withdraw funds in retirement.
If you expect to be in a higher income tax bracket and, therefore, subject to higher income tax rates in retirement, you may consider starting to convert your assets to mitigate future income taxes. For example, you might convert a portion of your traditional IRA funds to a Roth IRA each year in a manner that minimizes your income tax liability during retirement.
Rather than having your withdrawals taxed during retirement, Roth conversions allow you to decide the amount to convert and pay taxes on based on your taxable income or tax planning goals. Currently, there is no limit on the number of Roth conversions you can make from a traditional IRA, nor a limit on the amount converted, allowing you to spread conversions over multiple years. This approach may help you stay within a desired tax bracket or otherwise manage your future income tax liability while gradually shifting your funds to a Roth IRA.
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What about a backdoor Roth IRA contribution? A backdoor Roth IRA, more accurately described as a backdoor Roth contribution, is a strategy that allows those whose taxable income exceeds the contribution limits for a Roth IRA to convert assets to a Roth IRA without incurring taxes. A backdoor IRA contribution is a form of Roth conversion that involves making a non-deductible contribution to a traditional IRA and then converting these funds into a Roth IRA. Backdoor Roth contributions work best for minimizing taxes if you do not have a traditional IRA balance with pre-tax funds, as deductible contributions to a traditional IRA are taxable when converted. The IRS taxes traditional Roth conversions “pro rata,” meaning that if you have both pre-tax and after-tax funds in your traditional IRA, the taxable and non-taxable portions of a Roth conversion are calculated proportionally. For example, if 75% of contributions to your traditional IRA are deductible and the remaining 25% are non-deductible contributions, then 75% of the amount converted to a Roth IRA would be taxable. Properly reporting non-deductible contributions on IRS Form 8606 is critical to ensure the tax benefits of a backdoor Roth contribution are preserved. Consider engaging your wealth management team to evaluate whether a backdoor Roth contribution may fit your unique goals and circumstances.
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Estate planning benefits of Roth conversions
Converting your traditional IRA funds to a Roth IRA may also have estate planning benefits, particularly if you plan on leaving the account to individual beneficiaries. Since Roth IRAs do not require account owners to take RMDs, more assets may remain in the account, increasing the amount available for your beneficiaries.
If you anticipate that your estate will be subject to estate taxes, paying the associated income taxes of a Roth conversion may provide an avenue to strategically decrease the value of your taxable estate, potentially lowering your federal estate tax liability. Additionally, beneficiaries who inherit a Roth IRA may benefit from tax-free withdrawals, increasing the value of the inheritance by allowing them to access the account’s assets without incurring additional income tax.
Considerations for Roth conversions
Roth conversions, however, may not be a suitable choice depending on the situation. It is critical to be aware of the five-year holding period for Roth IRA earnings, potential impacts on your income tax liability, and possible increases in Medicare premiums.
For example, a five-year holding period applies to Roth IRAs, starting on January 1 of the year of conversion, meaning earnings could be taxed (and subject to a 10% penalty if taken before age 59 ½) if withdrawn before the account is five years old. If you plan on taking distributions from your traditional IRA in the next five years, it may not be tax-efficient to convert the funds to a Roth IRA. Roth conversions generally work best as a long-term strategy, as this allows more time for the assets in the account to potentially grow tax-free before retirement.
Further, Roth conversions increase your AGI in the year of conversion, which may push you into a higher tax bracket and lead to a higher income tax liability. Increasing your AGI may also impact your Medicare premiums. For Medicare Parts B and D, monthly premiums are determined by the policyholder’s MAGI from two years prior, as there is a two-year lookback for determining Medicare premiums. Medicare income thresholds are structured so that even a small increase in income can increase your monthly premiums. The benefits of a Roth conversion, however, may outweigh the extra premium costs in the long run.
Converting your traditional IRA to a Roth IRA may also be simply incompatible with your overall tax planning strategy. Careful consideration is needed when evaluating Roth conversions, as the converted amount may not be transferred back to the original IRA. Consider consulting your private wealth management team to analyze the impacts of a potential Roth conversion on your tax planning goals.
Comprehensive retirement planning from Commerce Trust
Strategies and methods for managing your tax liability and retirement accounts depend on your unique goals and circumstances. Converting funds from a traditional IRA to a Roth IRA may be an effective tax planning strategy, but it should be carefully considered as Roth conversions are not universally applicable and have tax implications of their own.
At Commerce Trust, your private wealth management team will spend time with you to understand your retirement goals before conducting an analysis of how Roth conversions might support your retirement plan. Specialists in retirement planning, estate planning, and tax management* coordinate to develop a tailored financial plan that aligns with your objectives, helping you preserve and grow your wealth.
Contact Commerce Trust today to learn more about our approach to creating a personalized, tax-efficient retirement plan that fits your financial goals.
1 Certain criteria must be met for the IRS to consider a withdrawal from a Roth IRA to be a qualified distribution. First, the account must be held for at least five years. Additionally, the account owner must be at least 59½ years old, though exceptions may apply in cases of the owner’s disability or death. Withdrawing early or within five years of conversion will trigger a 10% tax penalty.
*Commerce Trust does not provide tax advice to customers unless engaged to do so.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The opinions and other information in the commentary are provided as of March 5, 2025. This summary is intended to provide general information only and may be of value to the reader and audience.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents. Commerce Trust does not provide advice related to rolling over retirement accounts.
Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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