Roth IRA Conversions: What You Need to Know

Saving for retirement is a key part of any successful personal finance strategy, but there are a variety of ways to do so. From employer plans and pensions to individual retirement options, it’s important to understand your choices.

What is a Roth IRA Conversion and How Does It Work?

If you’ve been saving for retirement through a 401(k), Traditional IRA, or SEP-IRA, and would prefer to make tax-free withdrawals during retirement, you may want to consider converting some of your retirement funds into a Roth IRA. A Roth IRA differs from a Traditional IRA in that you contribute after-tax dollars instead of pre-tax dollars. This shifts the payment of taxes on your retirement savings up front instead of at the time of withdrawal. The potential benefit of funding retirement savings with after-tax dollars is that the funds and their growth are tax free when you take your retirement withdrawals.

When you open your Roth IRA and transfer funds from a non-Roth IRA into it, you’ll owe taxes on the money you convert. However, the money will accumulate tax-free, and you will not owe taxes when you take retirement withdrawals in later years. Additionally, unlike Traditional IRAs, Roth IRAs have no Required Minimum Distributions (RMDs) during your lifetime. If you anticipate moving to a higher tax bracket in future years, you may opt to pay taxes on your current funds now rather than paying at a higher rate later.

What Accounts Can I Convert to a Roth IRA?

You can convert any existing IRA to a Roth IRA. This includes:

• Traditional IRAs
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• 529 College Savings Plans (Eligible unused 529 funds can be rolled over to a Roth IRA under SECURE 2.0 rules, subject to conditions including a 15-year account holding requirement, annual contribution limits, and a $35,000 lifetime.)

You can also convert employer-based retirement plans such as 401(k) plans to a Roth IRA through a rollover option. Additionally, your 401(k) plan might provide the option to convert funds within your 401(k) to a Roth 401(k). Before considering rolling funds out of an existing 401(k) plan, it is important to familiarize yourself with any tax consequences and plan withdrawal terms.

Key Roth IRA Conversion Rules, Tax Bracket Impacts, and Limits

What Are the Roth IRA Conversion and Contribution Limits?

For the 2026 tax year, individuals can contribute $7,500 directly to a Roth IRA account — $8,600 if the investor is age 50 or older. These limits are subject to annual cost-of-living adjustments; confirm current limits at IRS.gov before contributing. However, there is no limit on the amount one can convert from a tax-deferred retirement plan to a Roth IRA within a given year. This means it’s possible to convert all retirement funds at once, but for tax reasons, not everyone chooses to do this.

What Is the 5-Year Rule for Roth IRA Conversions?

Time Horizon is an important consideration when converting to a Roth IRA. When funds are converted to a Roth IRA, they are subject to a five-year waiting period before they can be distributed. For this reason, a retirement investor should not roll over funds needed within five years or less. Ideally, funds in a Roth IRA should remain untouched for as long as possible to allow their tax-free earnings to grow.

It’s also important to remember that while you can convert pre-tax funds into a Roth IRA, you cannot “reverse” the decision and revert those funds into a traditional plan. In short, a Roth IRA conversion is permanent.

What Are the Tax Implications of a Roth IRA Conversion?

As mentioned above, while converting all tax-deferred contributions to a Roth IRA is possible, it may not be feasible or wise for every retirement investor. Converting a large sum of money into an after-tax account could push the investor into a higher tax bracket for the given year.

A retirement investor cannot avoid paying Roth IRA conversion taxes completely, but the investor may be able to minimize the tax burden by converting funds over several tax years. Alternatively, the investor could opt to convert during a year when income is lower.

Before making the conversion from a traditional retirement plan to a Roth IRA, talk to a trusted financial advisor. They’ll be able to help you decide which options are right for you and potentially help minimize your tax burden along the way.

A Roth conversion can be a valuable tool for creating tax clarity in retirement, but it requires careful evaluation,” says Wes Hackney, CFP®, Principal, Co-Founder, and Financial Planner at Marietta Wealth. “While paying taxes upfront eliminates future tax uncertainty on those assets, every investor’s tax bracket, timing, and cash flow needs are different. The key is analyzing whether paying taxes today puts you in a better position tomorrow.”

How to Do a Roth IRA Conversion: Step-by-Step Guide

Although converting retirement funds to a Roth IRA is a relatively simple process, it is important to consider all options prior to making a conversion. For example, depending on the amount already accrued in a traditional retirement account, an investor may be facing a substantial tax bill upon the rollover, so this option is not for everyone.

1.   Identify Your Traditional IRA or Employer Retirement Plan

If considering a Roth IRA conversion with funds already in a traditional tax-deferred retirement plan, those assets could be used to fund the Roth IRA conversion.

2.   Open a Roth IRA

A Roth IRA can be opened at financial institutions, such as a bank or brokerage firm.

3. Withdraw and Deposit Funds into Your Roth IRA

 There are several options for conversions:

• A direct rollover allows an investor to transfer funds from a defined contribution plan to a Roth IRA. This is a common option for those who are leaving their current job or have left money in a retirement account from a past employer. This option requires contacting the administrator of the retirement plan and having them send funds directly to the new Roth IRA.
• A trustee transfer allows retirement assets to be transferred directly from one financial institution or account to another. If the Roth IRA is at the same financial institution as the current tax-deferred retirement account, this is called a same-trustee transfer. If the Roth IRA is at a different financial institution, it’s called a trustee-to-trustee transfer.
• A 60-day rollover allows the funds from the current tax-deferred retirement account to be paid directly to the retirement investor. The retirement investor must deposit those funds into the new Roth IRA within 60 days for it to qualify as a Roth conversion. When choosing a 60-day rollover, the retirement investor must be aware that any money not deposited by the deadline will become taxable income. In addition, the retirement investor could also face a 10% early distribution tax penalty if the investor is under age 59.5. For these reasons, most individuals opt for one of the first two methods when converting to a Roth IRA.

When choosing a 60-day rollover, the retirement investor must be aware that any money not deposited by the deadline will become taxable income. In addition, the retirement investor could also face a 10% early distribution tax penalty if the investor is under age 59.5. For these reasons, most individuals opt for one of the first two methods when converting to a Roth IRA.

How Marietta Wealth Helps You Optimize Your Retirement Savings

If you’re unsure of how to maximize your retirement plans and improve your financial situation during your retirement years, Marietta Wealth can help. Our experienced advisors know that a sound financial plan can provide confidence and improve security during your working and retirement years.

From planning well for retirement to handling life’s unexpected events, our financial planning services can help you reach your goals and build wealth for the future. Reach out to a Marietta advisor today to get started.

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Financial planning and investment strategies involve risk, including the possible loss of principal, and cannot guarantee any specific outcome. 

This article is not intended to be used, and should not be used, as the sole basis for tax advice.  The reader should seek and rely upon the guidance and advice of accounting professionals before making decisions regarding any tax planning strategies.