{"id":12239,"date":"2025-12-16T10:07:45","date_gmt":"2025-12-16T18:07:45","guid":{"rendered":"https:\/\/www.wealthfront.com/blog\/?p=12239"},"modified":"2025-12-16T10:07:47","modified_gmt":"2025-12-16T18:07:47","slug":"roth-ira-conversion","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/roth-ira-conversion\/","title":{"rendered":"Is a Roth Conversion Right for You?"},"content":{"rendered":"\n<p>IRAs, or individual retirement arrangements, are a popular way to save for retirement, and with good reason: <a href=\"https:\/\/www.wealthfront.com\/blog\/ira-benefits-and-drawbacks\/\">IRAs have numerous benefits<\/a>. You may already be familiar with some of the different types of IRAs, including traditional IRAs and Roth IRAs.<strong> But you might not know it\u2019s possible for people who typically don\u2019t qualify for a Roth IRA to convert a traditional IRA into a Roth IRA.<\/strong>\u00a0<\/p>\n\n\n\n<p>Depending on the details, this process is known as a \u201cRoth conversion\u201d or a \u201cbackdoor Roth IRA,\u201d and in this post, we\u2019ll walk you through two common scenarios where they\u2019re likely to be beneficial.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">IRA basics<\/h2>\n\n\n\n<p>First, let\u2019s review a few basics about IRAs. IRAs are retirement accounts you open for yourself, unlike 401(k) plans which are offered through your employer. Roth and traditional IRAs have lower contribution limits than 401(k)s and they tend to have more flexibility around investment options. Here are some highlights at a glance:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Traditional IRAs:<\/strong> In general, depending on your income and whether you have a 401(k) plan at work, you get a tax deduction in the year you contribute to a traditional IRA and then pay taxes on withdrawals.<\/li>\n\n\n\n<li><strong>Roth IRAs:<\/strong> You don\u2019t get a tax deduction when you contribute to a Roth IRA, but withdrawals after age 59 \u00bd are tax-free. You can\u2019t contribute directly to a Roth IRA if you earned $165,000 and over as a single filer or $246,000 and over as a married joint filer in <a href=\"https:\/\/www.irs.gov\/newsroom\/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000\">2025<\/a>, and those numbers rise to $168,000 and $252,000 respectively in <a href=\"https:\/\/www.irs.gov\/newsroom\/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500\">2026<\/a>.<\/li>\n<\/ul>\n\n\n\n<p>The tax advantages of both account types can be significant, but the tax-free growth and withdrawals you get with a Roth IRA can be especially powerful. Not everyone is eligible to contribute to a Roth IRA directly, so that\u2019s where Roth conversions come in. A Roth conversion is when you move money from a traditional IRA to a Roth IRA. You might owe taxes in the year of the conversion, depending on whether you have any pre-tax funds in your account, but then your withdrawals from your Roth IRA after age 59 \u00bd\u00a0 are tax-free.<\/p>\n\n\n\n<p>Let\u2019s look at two instances where a Roth conversion is likely to be beneficial.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Scenario 1: One-off Roth conversion in a low-earning year<\/h2>\n\n\n\n<p>Let\u2019s say you know you\u2019re in an unusually low-earning year. Maybe you\u2019re going to grad school or you\u2019re taking time off to travel. You have an existing traditional IRA with some pre-tax funds in it (either because you rolled over a 401(k) from a previous employer or you contributed to one directly), and since you\u2019re in a lower-than-usual tax bracket, now could be a good time to pay taxes on the conversion and then benefit from the tax-free growth and withdrawals you get with a Roth IRA in the future.<\/p>\n\n\n\n<p>Let\u2019s look at an example of how this might work. Assume your ordinary income tax rate will be 20% this year instead of the 40% it would be in a typical year. You have $10,000 (pre-tax) in a traditional IRA, and you\u2019re wondering if you should execute a Roth conversion. If you were to leave the money in a traditional IRA for 30 years, assuming a 6% return compounded annually, it would be worth $34,460.95 after paying a 40% tax upon withdrawal. However if you converted the account to a Roth IRA, you\u2019d pay $2,000 in taxes now (that\u2019s your 20% current income tax rate multiplied by the value of the account), but the value of the remaining $8,000 compounded at 6% annually over the next 30 years would be worth $45,947.93 after taxes, because you wouldn\u2019t owe any additional taxes upon withdrawal as long as you were at least 59 \u00bd years old. <strong>In other words, converting your traditional IRA in a low-earning year has the potential to give your retirement savings a big boost.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Scenario 2: Backdoor Roth to save more for retirement<\/h2>\n\n\n\n<p>Let\u2019s assume you earn too much to contribute directly to a Roth IRA and you aren\u2019t eligible to deduct contributions to a traditional IRA (either because your income is too high or because you have a 401(k) plan at work), but you still want to save some additional money for retirement. Assuming you don\u2019t have any pre-tax money in a traditional IRA and don\u2019t anticipate needing the funds within five years, you\u2019re likely to benefit from a type of Roth conversion known as a \u201cbackdoor Roth.\u201d\u00a0<\/p>\n\n\n\n<p>Again, we\u2019ll explain with an example. If you fit the description above, you can either invest by opening a taxable investment account or making a non-deductible contribution to a traditional IRA. If you invest $7,000 in a taxable investment account at a 6% return compounded annually over 30 years, ignoring the taxes you\u2019d have to pay on dividends and the gains associated with account rebalancing, your account would be worth $40,204.44 at retirement, but you\u2019d still owe capital gains taxes when you sell to withdraw. If your capital gains tax rate in retirement were 15% then that account would only be worth $35,223.77 after taxes. However if you contributed $7,000 (after-tax) to a traditional IRA (this is the contribution limit for 2025 if you are under 50) instead and converted to a Roth IRA, your account would be worth $40,204.44 at withdrawal because you would owe no taxes on the sales (again, assuming you were at least 59 \u00bd at the time).\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">When a Roth conversion isn\u2019t right for you<\/h2>\n\n\n\n<p>If you\u2019re still unsure, here are two signs that a Roth conversion probably isn\u2019t right for you:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>You plan to retire within five years.<\/strong> You have to wait at least five years to withdraw earnings from a Roth IRA with no penalty, even if you are 59 \u00bd years old (the typical age at which you can start taking withdrawals with no penalties).\u00a0<\/li>\n\n\n\n<li><strong>You don\u2019t have enough cash on hand to pay taxes on the conversion. <\/strong>These taxes could be significant if you have a lot of pre-tax money in a traditional IRA. You can estimate them by multiplying the amount of pre-tax money in your traditional IRA by whatever you expect your marginal tax rate to be.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Automation makes it easy<\/h2>\n\n\n\n<p>Typically, the Roth conversion process involves a bunch of paperwork. But at Wealthfront, we\u2019ve automated the process so you can convert a Wealthfront SEP or traditional IRA to a Roth IRA with just a few taps on your phone. Automated Roth conversions are just one of the many tax-minimization features we offer you at no additional cost, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Tax-Loss Harvesting, both at the ETF level and the individual stock level\u00a0<\/li>\n\n\n\n<li>Tax-minimized withdrawals<\/li>\n\n\n\n<li><a href=\"https:\/\/support.wealthfront.com\/hc\/en-us\/articles\/209348146-How-to-transfer-investments-to-Wealthfront-from-another-brokerage\">Tax-minimized brokerage transfer<\/a><\/li>\n\n\n\n<li>Tax-sensitive rebalancing\u00a0<\/li>\n<\/ul>\n\n\n\n<p>At Wealthfront, we want to help you build wealth so you can meet your financial goals (like retirement!) with confidence. We hope the information in this post helps you make an informed decision about Roth conversions. For even more help planning for retirement, check out our <a href=\"https:\/\/www.wealthfront.com\/ira-calculator\">IRA calculator<\/a>.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>IRAs, or individual retirement arrangements, are a popular way to save for retirement, and with good reason: IRAs have numerous benefits. You may already be familiar with some of the different types of IRAs, including traditional IRAs and Roth IRAs. But you might not know it\u2019s possible for people who typically don\u2019t qualify for a [&hellip;]<\/p>\n","protected":false},"author":129,"featured_media":12260,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282,1278,1367],"tags":[1312,1982,1368,2023],"coauthors":[2504],"class_list":["post-12239","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","category-planning","category-retirement","tag-ira","tag-roth-conversion","tag-roth-ira","tag-sep-ira"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Who Should Consider a Roth IRA Conversion | Wealthfront<\/title>\n<meta name=\"description\" content=\"Roth IRA conversions can be a powerful way of growing your retirement savings, but they&#039;re not right for everyone. 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