August 10, 2026
This move can reduce income taxes in retirement — but can increase your tax bill now. Here's how to weigh the trade-off.
Key takeaways
- There are no income restrictions on Roth IRA conversions.
- Distributions from Roth IRAs are left out of federal (and possibly state) income if they are qualified distributions under the Internal Revenue Code.
- The pre-tax funds you convert are considered taxable income, but partial conversions enable you to spread out the taxable amount over multiple tax years.
While there are many factors to consider, including how changes might affect your tax planning, converting your traditional IRA assets or employer-sponsored retirement account to a
Roth IRA may offer you more flexibility and control over your nest egg in retirement.
To help determine whether converting assets to a Roth IRA might be right for you, consider the answers to the questions below. Consult with a tax and/or legal advisor before making any decisions.
Who can convert a traditional IRA to a Roth IRA?
Anyone can
convert a traditional IRA, or other eligible retirement plan account
assets,Footnote 1 to a Roth IRA, a move that offers distinct tax benefits. There are no income restrictions on Roth IRA conversions; however, conversions from employer-sponsored plans depend on plan terms and distribution eligibility. The only requirement is that the pre-tax conversion amounts must be properly included in income in the year of conversion. But not everyone can contribute to a Roth IRA. Eligibility to contribute is based on your modified adjusted gross income (MAGI), which generally is adjusted gross income that is modified by adding back certain exclusions and deductions. To learn more, view the
annual limits guide (PDF).
Converting presents an opportunity to potentially lessen your tax burden in retirement — and offers greater flexibility to manage withdrawals since the original Roth IRA account holder (versus someone who inherits a Roth IRA as the account's beneficiary) never has to make
required minimum distributions (RMDs). When deciding what to do with a 401(k) account from a previous job,
review all your choices, including a Roth IRA conversion.
Did you know? If you're contributing to a traditional 401(k) now and your employer also offers a Roth 401(k), you might also have an option to convert your account to a Roth using what is called an in-service Roth conversion if the plan's terms provide for such a conversion.
How does a Roth IRA work?
With a Roth IRA or Roth employer-sponsored retirement account, you contribute after-tax money, and any distribution that is a qualified distribution is left out of federal (and possibly state) income. A qualified distribution is a distribution when at least five years have elapsed from the first day of the year of your initial Roth contributionFootnote 2 — or conversion if earlier — and you have reached age 59½ or become disabled or deceased.
Separate five-year rules apply to Roth conversions for purposes of avoiding early withdrawal additional taxes. By contrast, with a traditional 401(k) account or traditional IRA, any growth or earnings in the account is federal (and possibly state) income tax deferred, and distributions are included in your taxable income to the extent attributable to pre-tax contributions and earnings.
Understanding traditional versus Roth IRAs
Here's how these two popular retirement accounts compare on major features
| |
Traditional IRA |
Roth IRA |
| Eligibility to contribute |
No income limits |
Phased out above certain MAGI levels |
| Tax deductibility |
Contributions may be tax deductible based on income and access to employer-sponsored retirement plan |
No upfront deduction; funded with after-tax dollars |
| Other tax benefits |
Pre-tax contributions and earnings are tax-deferred; withdrawals generally taxed as ordinary income |
Withdrawals are generally not included in federal income if certain requirements are met |
| RMD rules |
Must begin withdrawals at age 73 (or age 75 for those born in 1960 or later) or face an additional excise tax of up to 25%, which may be reduced to 10% if corrected promptly |
No RMDs for the original account owner |
How do early Roth IRA withdrawals work?
If you make a withdrawal that doesn't meet the definition of a qualified distribution, you will generally owe ordinary income tax (at the federal and possibly state level) on the earnings portion of the withdrawal. Plus, if you're under age 59½, you'll be subject to a 10% early withdrawal additional tax on those earnings.Footnote 3 There are some exceptions to the IRA owner owing a 10% additional tax upon distribution, including:
- The purchase of a first home (lifetime limit of $10,000)
- Up to $5,000 (per parent) for a qualified birth or adoption
- Medical expenses to an IRA owner who is terminally ill
- Costs related to a federally declared disaster
- Someone who is a victim of domestic abuse
- A withdrawal of up to $1,000 per year for emergency personal or family expenses
What are the benefits of a Roth conversion?
Many investors hold a significant portion of their retirement savings in a tax-deferred plan, such as a traditional 401(k). The money in those plans will be taxed as ordinary income when you make withdrawals in retirement. Converting all or some of that savings to a Roth IRA offers these potential benefits:
- Future tax-free income. A conversion creates a bucket of savings you can draw on without having to include such amounts in federal (and possibly state) income, enabling your retirement assets to be diversified from a tax perspective. Qualified distributions from a Roth IRA would not be taxed or counted toward your taxable income. This is a great perk if you are in a higher tax bracket in retirement or experience a one-time bump to your income that might push you into a higher tax bracket.
- No mandatory withdrawals. You're never required to take withdrawals from your Roth IRA (as long as you are the original account holder). With a traditional IRA, RMDs begin at age 73 (or age 75 for those born in 1960 or later).Footnote 4 You also can continue to contribute to your Roth IRA for as long as you earn income, no matter your age, provided your MAGI is within the eligibility limits.
- Tax savings for the next generation. If you let your Roth IRA potentially grow tax-free indefinitely and leave it to your heirs, their withdrawals are generally tax-free if the Roth IRA meets the applicable five-year holding requirements. When your beneficiaries inherit your IRA, however, they may have to draw down the account within 10 years, so you may want to discuss the trade-offs with your tax advisor.
Who's a candidate for a Roth conversion?
While a Roth IRA conversion offers potential benefits, it also has tax implications. The pre-tax amounts you convert from a traditional IRA or other eligible retirement plan to a Roth IRA are treated as a taxable distribution, making them subject to ordinary income taxes the year you convert.
Converting to a Roth IRA now may be worth considering if you can afford to pay the income taxes on the conversion without dipping into your traditional IRA assets and at least one of these situations applies:
- You expect to be in a higher tax bracket in retirement
- You are temporarily in a lower tax bracket — for example, during parental leave or another job gap
- A drop in the market means the value of your IRA is lower, resulting in less earnings that will be included in your taxable income in the conversion
- You have unused tax deductions (such as charitable contributions or medical expenses) that can help offset the taxable income generated by the conversion
- You wish to potentially reduce the after-tax burden on your heirs by prepaying income taxes
Did you know? You don't have to convert the entire traditional IRA account balance at once. You can do a partial conversion — that is, convert a portion of your assets over several years, thereby spreading out your amounts included in a taxable year's income.
Finally, while you can convert a traditional IRA to a Roth IRA at any age, the longer your time horizon until retirement, the more sense it may make. You're likely to be in a lower tax bracket earlier in your career, so the tax hit will be less. And the more years you have before you retire, the greater the potential will be for your Roth IRA balance to grow federally tax-free.
A financial advisor and tax professional can walk you through these considerations and help you make an informed decision as to the best strategy for managing your retirement accounts.
Footnote 1 The following account types are eligible for conversion to a Roth IRA: traditional IRA, rollover IRA, SEP IRA, and SIMPLE IRA (after the two-year SIMPLE IRA holding period has been satisfied), as well as assets in tax-qualified retirement plans such as 401(k), 403(b), profit-sharing and money purchase plans and governmental 457(b) plans. Note, however, that qualified plan or governmental 457(b) plan assets are only available for conversion to a Roth IRA if they are otherwise permitted to be distributed from the plan under the plan terms.
Footnote 2 This five-year period begins on January 1 of the tax year for which the first contribution to a Roth IRA was made, or January 1 of the tax year in which the applicable conversion to a Roth IRA was made.
Footnote 3 In addition, a special tax provision applies for converted assets. If a non-qualified withdrawal is made within five years following the conversion, the earnings portion of the distribution must be includible in income, and the portion attributable to converted amounts may be subject to an additional federal tax unless an exception applies as applicable for conversions. Consult your tax advisor for details.
Footnote 4 The required beginning date for RMDs is April 1 of the year after you turn age 73 (or age 75 for those born in 1960 or later). You are required to take an RMD by December 31 each year after that. If you delay your first RMD until April 1 in the year after you turn 73, you will be required to take two RMDs in that year. You may be subject to additional taxes if RMDs are missed. Please see your tax advisor regarding your specific situation.
Investing involves risk. There is always the potential of losing money when you invest in securities.
Diversification does not ensure a profit or protect against loss in declining markets.
A special five-year period applies to assets held in a Roth IRA that were previously converted from a traditional IRA or employer-sponsored retirement plan. If you take a distribution from your Roth IRA during the special five-year period that begins on January 1 of the year of the Roth conversion, the portion of the distribution that is attributable to converted amounts may be subject to a 10% additional federal tax if you are younger than age 59½ at the time of the distribution, unless an exception applies. A separate five-year period applies to each conversion, and special ordering rules determine the order in which converted amounts are treated as being withdrawn from the account.
Generally, for a distribution from a Roth IRA to not be required to be includible in federal (and possibly state and local) income, it must be a qualified distribution. A qualified distribution from your Roth IRA may be made after a five-year period has been satisfied (this period begins January 1 of the tax year of the first contribution or the year of conversion to any Roth IRA) and you either (i) are age 59½ or older, (ii) are disabled, (iii) or qualify for a special purpose distribution, which is for the purchase of a first home (lifetime limit of $10,000). In situations where the original account owner is deceased and the five-year period has been satisfied, distributions to the beneficiary are also considered a qualified distribution. If you receive a non-qualified distribution from your Roth IRA, the earnings portion of such distribution generally must be included in your federal (and possibly state and local) income, plus a 10% early withdrawal additional tax if received before age 59½ unless an exception applies. A 10% early withdrawal additional tax may also be owed on converted Roth IRA principal withdrawn before the end of the special five-year period beginning on January 1 of the year of the conversion. Although RMDs are not required for the original account owner, RMDs would generally apply to the inherited Roth IRA account.
The 10% additional federal tax generally applies to withdrawals from a Roth IRA before age 59½, but certain exceptions apply, such as, but not limited to, death, disability, qualified birth or adoption of a child, and first-time home purchase (lifetime limit of $10,000). If you leave your employer in the year you reach age 55 or later, distributions from your employer-sponsored qualified retirement plan will be exempt from the 10% additional tax. A tax advisor can help you determine whether the additional tax applies to your situation.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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