Why consider a Roth IRA Conversion?

Roth IRA rules can appear limiting at first glance—but you may be able to fund a Roth by rolling over funds from another account.

Say you want to fund a Roth IRA to take advantage of those tax-free withdrawals in retirement, but your income is too high to contribute directly to a Roth IRA. For 2020, this would be the case if your income is over $139,000 if you’re single and $206,000 if you’re married filing jointly. For 2021, this would be the case if your income is over $140,000 if you’re single and $208,000 if you’re married filing jointly.

The good news: Roth IRA rules allow you to get around this restriction if you convert funds from a traditional IRA to a Roth.

See step-by-step instructions for converting your Traditional IRA to a Roth IRA.

There are no income limits (since 2010) for converting to a Roth, and no limit on the amount you can convert. If your traditional IRA is already at Betterment, the conversion just takes a couple of clicks.

The not-so-good news: In most cases, when you convert funds from a tax-deferred account to a Roth, it’s considered a taxable event, meaning you may owe taxes on some or all of the amount converted.

How can you minimize the tax hit?

One strategy that could enable you to take advantage of a Roth, but not get hit with a super high tax bill, is to do what’s known as a backdoor Roth contribution—the how-to is detailed below—or plan ahead and take advantage of upcoming life or career changes that could nudge you into a lower tax bracket.

Here’s how to make that Roth conversion happen.

Note: Betterment is not a tax advisor, nor should any information in this article be considered tax advice. You should contact a tax professional to discuss your specific situation.

High Earners Go For Roth IRAs

If a Roth account sounds appealing, you’re in good company. Roth IRAs suit many high-income earners because they want a way to help minimize taxes in retirement—and unlike distributions from a traditional IRA, Roth funds are withdrawn tax-free if they meet basic requirements.

Indeed, when the IRS removed the income limit on Roth conversions in 2010, the number of conversions “increased over 800%, to $64.8 billion,” according to a January 2014 IRS report. It was the first time conversions exceeded contributions. And 57% of the conversions were from people with six-figure incomes.

This article is intended for educational purposes only. The information provided is educational in nature, and is not intended to be relied upon as financial or tax advice. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action. Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.