Category: Retirement

A Roth IRA conversion moves money from a traditional IRA (or other pre-tax retirement account) into a Roth IRA. You pay income taxes on the converted amount in the year of conversion, but future growth and qualified withdrawals are tax-free. For many people, strategic Roth conversions are one of the most valuable moves in long-term retirement planning.

How a Roth IRA Conversion Works

When you convert traditional IRA funds to a Roth IRA, the converted amount is added to your taxable income for that year. You pay taxes at your current marginal rate on the converted amount. After that, the funds grow tax-free in the Roth IRA and qualified withdrawals in retirement are completely tax-free.

Example: You have $50,000 in a traditional IRA and are in the 22% federal tax bracket. Converting $20,000 to a Roth IRA adds $20,000 to your taxable income, resulting in $4,400 in additional federal taxes. From that point forward, the $20,000 (plus future growth) is in a Roth account and will never be taxed again.

Who Should Consider a Roth Conversion?

Roth conversions make the most sense when:

• You expect to be in a higher tax bracket in retirement — paying taxes now at a lower rate beats paying later at a higher rate
• You are in a low-income year — job loss, career transition, early retirement, or business losses can create a window of unusually low taxable income
• You want to reduce future RMDs — Roth IRAs have no required minimum distributions during the owner’s lifetime; traditional IRAs require RMDs starting at age 73
• You want to leave tax-free assets to heirs — inherited Roth IRAs offer more flexibility than inherited traditional IRAs
• You have money outside the IRA to pay the taxes — paying conversion taxes from non-IRA funds maximizes the benefit

2026 Roth IRA Conversion Rules

No Income Limits

Unlike Roth IRA contributions (which phase out at higher income levels), there is no income limit on Roth conversions. Anyone can convert traditional IRA funds to a Roth IRA regardless of income. This is the basis of the backdoor Roth IRA strategy for high earners.

No Dollar Limit

There is no annual limit on how much you can convert. You can convert your entire traditional IRA balance in one year if you choose. However, converting too much in a single year can push you into a higher tax bracket unnecessarily.

Five-Year Rule

Each Roth conversion has its own five-year clock. You must wait five years before withdrawing converted amounts without penalty (unless you are 59.5 or older). This matters if you need the funds within five years of conversion — otherwise the five-year rule does not affect you.

Pro-Rata Rule

If you have both pre-tax (traditional IRA) and after-tax (non-deductible IRA) funds in any traditional IRA, the pro-rata rule requires you to treat conversions proportionally. You cannot cherry-pick only after-tax dollars for conversion.

How to Calculate Taxes on a Roth Conversion

The converted amount is treated as ordinary income. Add the conversion amount to your other income for the year and calculate the marginal tax rate.

Watch for these tax traps triggered by additional income:

• Medicare IRMAA surcharges: Higher income two years prior can increase Medicare premiums
• Social Security taxation: Additional income can cause more of your Social Security to be taxable (up to 85%)
• Affordable Care Act subsidies: Higher income can reduce or eliminate marketplace health insurance subsidies
• Net Investment Income Tax: MAGI above $200,000 single / $250,000 married triggers 3.8% on investment income

Roth Conversion Strategy: The “Fill the Bracket” Approach

Rather than converting everything at once, many tax advisors recommend converting just enough each year to “fill up” your current tax bracket without crossing into the next one.

Example using 2026 tax brackets (married filing jointly):

• Your taxable income is $90,000
• The 22% bracket for MFJ runs from $94,300 to $201,050
• You can convert up to $111,050 and stay in the 22% bracket ($201,050 – $90,000)
• This is especially attractive if you expect to be in the 24% or 32% bracket in retirement

How to Execute a Roth IRA Conversion

Same-Institution Conversion

If your traditional IRA and Roth IRA are at the same brokerage, you can typically complete a conversion through the online interface in minutes. Look for a “convert to Roth” option under account management.

60-Day Rollover Method

You take a distribution from your traditional IRA (the custodian withholds 20% for taxes unless you elect not to withhold), then deposit the full amount into a Roth IRA within 60 days. You must come up with the withheld 20% from other funds to avoid it being treated as a distribution.

Direct Trustee-to-Trustee Transfer

The cleanest method. Request your traditional IRA custodian send funds directly to your Roth IRA custodian. No withholding, no 60-day deadline, and no risk of triggering a taxable distribution.

Paying the Tax Bill on a Roth Conversion

Ideally, pay conversion taxes from outside the IRA using taxable account funds. This maximizes the amount that goes into the Roth and earns tax-free returns. Paying taxes from the conversion itself reduces the effective amount converted and inside a Roth account.

You may need to make estimated tax payments if the conversion creates a significant tax liability. Use IRS Form 1040-ES to calculate and submit quarterly estimates to avoid an underpayment penalty.

Roth Conversion FAQ

Can I undo a Roth conversion?

No. Recharacterization (undoing a conversion) was eliminated by the 2017 Tax Cuts and Jobs Act for Roth conversions. Once converted, the transaction is permanent.

What is the best age for a Roth conversion?

The years between retirement (when income typically drops) and age 73 (when RMDs begin) are often called the “Roth conversion window.” During this window, income may be lower than during working years or retirement with full RMDs, creating an opportunity to convert at lower tax rates.

Does a Roth conversion affect Roth contribution limits?

No. Roth conversions are separate from annual Roth contributions and do not count toward the contribution limit.

Related: What Is the FIRE Movement? How to Retire Early in 2026

Saving for retirement in your 20s is the single most powerful financial move you can make. Time is your biggest asset: money invested at 25 has 40+ years to compound. The same dollar invested at 45 has less than half that time. Starting early — even with small amounts — creates an enormous advantage.

Why Starting Early Changes Everything

Compound interest means your returns earn returns. A one-time $5,000 investment at age 25, earning 8% annually, grows to roughly $108,000 by age 65. The same $5,000 invested at 45 grows to only about $23,000. That is a $85,000 difference from a single decision made 20 years earlier.

Step 1: Get Your 401(k) Match First

If your employer offers a 401(k) match, contribute at least enough to capture the full match before anything else. A 50% match on up to 6% of your salary is a 50% instant return — better than any investment. Not capturing the match is leaving free money on the table.

Even if 6% feels like a lot, start at 3-4% and increase by 1% each year or whenever you get a raise.

Step 2: Open a Roth IRA

After capturing your 401(k) match, open a Roth IRA. In 2026, you can contribute up to $7,000 per year ($8,000 if you’re 50 or older). Your contributions are made with after-tax dollars, and all growth is tax-free. Withdrawals in retirement are also tax-free.

Your 20s are the best time for a Roth IRA because your income — and tax rate — is likely lower than it will be later. Paying taxes now on a small income to get decades of tax-free growth is a strong trade.

Income limits apply: in 2026, single filers can contribute the full amount up to $150,000 in modified adjusted gross income (MAGI), with a phase-out through $165,000.

Step 3: Choose the Right Investments

For retirement accounts in your 20s, a simple approach works best:

• Target-date fund: Pick a fund dated near your expected retirement year (e.g., a 2060 fund if you’re 25 now). It automatically adjusts from aggressive to conservative as you approach retirement. Lowest-effort option, very effective.
• Three-fund portfolio: A US stock index fund + international stock index fund + bond index fund. Low cost, diversified, historically reliable. Adjust bond allocation based on risk tolerance (most 20-somethings should be 80-90% stocks).

Avoid picking individual stocks for your retirement account. The research consistently shows that low-cost index funds outperform actively managed funds and stock pickers over long horizons.

How Much Should You Save?

The standard target is 15% of gross income for retirement, including any employer match. In your 20s, getting to 10-15% is excellent. If 15% is too much right now, start at whatever you can afford and increase over time.

A useful benchmark: if you save 15% starting at 25, you should have enough to retire at 65 with a similar lifestyle. If you start at 35, you need to save closer to 25%.

Should You Prioritize Paying Off Debt or Investing?

General rule: if your debt interest rate is higher than your expected investment return (roughly 6-8%), prioritize paying off debt. If it is lower, invest and pay debt minimums.

• High-interest credit card debt (18%+): Pay off aggressively before investing beyond the 401(k) match.
• Student loans at 5-7%: Toss-up. Consider investing while making minimum loan payments.
• Low-rate mortgage or federal student loans at 3-4%: Invest. The expected market return beats the debt cost.

The Emergency Fund First

Before maxing out retirement accounts, build 3-6 months of expenses in a high-yield savings account. Without an emergency fund, an unexpected expense forces you to withdraw from retirement accounts — which triggers taxes and a 10% penalty. The emergency fund is your safety net.

What If You Are Behind?

If you are in your late 20s and have not started yet, do not panic. Starting now is significantly better than starting at 30, 35, or 40. Open a Roth IRA today, contribute whatever you can, and automate monthly contributions. Consistent contributions over time build real wealth.

Bottom Line

In your 20s, get the 401(k) match, open a Roth IRA, invest in index funds, and automate contributions. Time is your most valuable financial asset — every year you delay costs you more than any market downturn will.

The Core Difference: When You Pay Taxes

Both a Roth IRA and a traditional IRA let you invest money for retirement and grow it without paying taxes on dividends or capital gains each year. The difference is when you pay income tax on the money.

• Traditional IRA: You may get a tax deduction now. You pay taxes when you withdraw money in retirement.
• Roth IRA: No deduction now. You pay taxes on the money before it goes in. Withdrawals in retirement are tax-free.

The question is simple: do you want to pay taxes now or later?

2026 Contribution Limits

The IRA contribution limit in 2026 is $7,000 per year. If you are 50 or older, you can contribute an extra $1,000 (the catch-up contribution), for a total of $8,000.

This limit applies across all your IRAs combined. If you have both a Roth and a traditional IRA, your combined contributions cannot exceed $7,000.

Roth IRA Income Limits in 2026

Not everyone can contribute to a Roth IRA. The ability to contribute phases out at higher income levels:

• Single filers: Full contribution up to $150,000 MAGI; phases out between $150,000 and $165,000
• Married filing jointly: Full contribution up to $236,000 MAGI; phases out between $236,000 and $246,000

If your income exceeds these limits, you cannot contribute directly to a Roth IRA. You may be able to use the backdoor Roth IRA strategy — contributing to a traditional IRA and converting it — if this applies to you.

Traditional IRA Deductibility in 2026

Traditional IRA contributions are tax-deductible only if you meet certain conditions. If neither you nor your spouse has a workplace retirement plan (like a 401(k)), contributions are fully deductible at any income level.

If you or your spouse have access to a 401(k) or similar plan, the deduction phases out at these income levels:

• Single filers covered by a workplace plan: Deductible up to $79,000 MAGI; phases out up to $89,000
• Married filing jointly (covered by a plan): Deductible up to $126,000 MAGI; phases out up to $146,000

If your income is above these limits and you have a workplace plan, traditional IRA contributions are not tax-deductible. In that case, a Roth IRA (if you qualify) is almost always better.

Which Is Better: Roth or Traditional?

The answer comes down to whether your tax rate is higher now or in retirement. There are two general rules:

Choose a Roth IRA if:

• You are in a low tax bracket now and expect to be in a higher one in retirement
• You are early in your career with room to grow your income
• You want tax-free income in retirement with no required minimum distributions
• You might need to access contributions (not earnings) before retirement — Roth contributions can be withdrawn any time without penalty

Choose a traditional IRA if:

• You are in a high tax bracket now and expect to be in a lower one in retirement
• You need the tax deduction this year to reduce your tax bill
• Your income is above the Roth IRA limit

Early Withdrawal Rules

Both account types charge a 10% penalty on early withdrawals (before age 59½), with exceptions. But there is a key difference:

• Roth IRA: You can withdraw your contributions (not earnings) at any time without taxes or penalty. Only the earnings are subject to penalties if withdrawn early.
• Traditional IRA: All withdrawals are subject to income tax and the 10% penalty if taken before 59½ (with exceptions like first-time home purchase, disability, or medical expenses).

Required Minimum Distributions (RMDs)

Traditional IRAs require you to start taking minimum distributions at age 73. These withdrawals are taxed as ordinary income and can push you into a higher tax bracket in retirement.

Roth IRAs have no RMDs during the owner’s lifetime. This makes Roth IRAs powerful for people who do not need the money in retirement and want to pass tax-free assets to heirs.

Can You Have Both?

Yes. You can contribute to both a Roth IRA and a traditional IRA in the same year — as long as your combined contributions do not exceed the annual limit ($7,000 in 2026).

Many financial advisors recommend contributing to a 401(k) first (at least up to the employer match), then a Roth IRA, then back to the 401(k) if you have more to invest.

Bottom Line

For most people in their 20s and 30s who expect their income to rise, the Roth IRA wins. Tax-free retirement income and no RMDs are powerful advantages that compound over decades.

If you are in a high tax bracket now and need the deduction today, the traditional IRA makes more sense. When in doubt, the Roth IRA is the better default for younger investors.