March 2026 – Understanding Roth Conversions

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March 2026 – Understanding Roth Conversions

Roth Conversions and Backdoor Roth IRAs: What to Know Before Making a Move

As a part of our ongoing tax planning conversations, we want to highlight an important strategy that can be beneficial in the right circumstances: Roth IRA conversions, including the commonly discussed Backdoor Roth IRA.

While Roth strategies are not right for everyone, understanding how they work – and when they make sense – can help you make more informed long-term decisions.

What is a Roth Conversion?

A Roth Conversion occurs when you move funds from a traditional IRA or pre-tax retirement account into a Roth IRA.

    • The amount converted is taxable in the year of conversion.
    • Once in a Roth IRA, future qualified withdrawals are tax-free, and earnings grow tax free.

There is no income limitation on Roth conversions, and conversions can be made at any age.

When Does a Roth Conversion Make Sense?

This strategy can make sense for individuals who expect to be in higher tax brackets at a later point, are temporarily in a lower-income year, or want to reduce future required minimum distributions (RMDs).

Roth IRAs are not subject to lifetime RMDs, which can help manage taxable income in retirement and reduce exposure to Medicare premium surcharges.

Roth conversions may also support estate planning goals, as beneficiaries generally receive Roth assets income-tax free. While a Roth conversion is not appropriate for every taxpayer, a planned approach can be an effective way to improve long-term after-tax outcomes.

Potential Benefits of a Roth Conversion

A Roth Conversion can provide the following benefits:

    • Tax-free growth and withdrawals in retirement.
    • No required minimum distributions (RMDs) during your lifetime.
    • Hedge against future tax rate increases.
    • Estate planning benefits, as beneficiaries generally receive tax-free distributions as long as the account has been open for at least 5 years. The beneficiaries will need to take RMDs from the inherited Roth IRAs, but they will not be taxed on the distributions.
    • Ability to strategically convert during lower-income or lower-tax years.

Important Trade-Offs to Consider

Before converting, it is critical to understand the potential downsides:

    • The converted amount is taxed as ordinary income in the year of the conversion
    • A conversion may:
      • Push you into a higher tax bracket
      • Increase Medicare premiums
      • Reduce certain tax credits or deductions
    • Using IRA funds to pay the tax reduces the amount that continues to grow tax-advantaged
    • Roth IRA conversions are permanent, meaning a taxpayer will not be able to convert the funds back to a traditional IRA.
    • Converted funds are tax-free as long as the taxpayer waits 5 years before taking distributions that were part of the Backdoor Roth conversion, and the taxpayer is 59 ½ years of age or older.
    • If distributions are taken out of a Roth IRA before the taxpayer is 59 ½ years old, there is a 10% tax on the distribution. There are a few exceptions to this 10% tax, including the following:
      • The taxpayer has passed away
      • The taxpayer is taking a disability distribution
      • The taxpayer is taking the first-time homebuyer’s distribution

Because of these factors, conversions should be analyzed carefully.

Qualifications to Contribute to a Roth IRA

To contribute to Roth IRA, you must have earned income and meet certain income limits set by the IRS.

For single filers in 2026, the phase out range is $153,000 to $168,000, while for married filing jointly, it is $242,000 to $252,000. If your income is in these ranges or above, your contribution may be limited or completely disallowed.

    • If your income is below these ranges, you can contribute up to the annual limit, which is $7,500 in 2026, or $8,600 for those aged 50 and over.
    • You can also contribute to a Roth IRA at any age, as long as you have qualifying earned income.

Even if your income exceeds the limits for making contributions to a Roth IRA, you are still able to do a Roth conversion, sometimes called a “backdoor Roth IRA”.

What Are Backdoor Roth IRA conversions (BRC)?

This is a tool that can be used to bypass the IRS’ income limitation on Roth IRA contributions.

To do a Backdoor Roth conversion, there is a two-step process:

    1. A contribution is made to a traditional IRA account (2026 limits are $7,500 or $8,600 for those aged 50 and over)
      1. Tax basis is generated in the traditional IRA if a contribution did not generate a tax deduction for the individual due to high income levels.
    2. The individual can then convert the funds contributed into the traditional IRA account into a Roth IRA account generally tax free.

Since the money transferred from the traditional IRA is after-tax money and the taxpayer did not receive a tax deduction for their contribution, the Backdoor Roth transaction may be tax-free. *Please note, this is the case as long as there has been no growth on the funds contributed into the traditional IRA account.  If there is growth in the traditional IRA before conversion, these earnings will be taxed.  Generally, the contribution and conversion will be made concurrently and there will not be any earnings incurred in the traditional IRA account.  Also note, if the contribution is tax-deductible and the taxpayer did receive the tax benefit for their traditional IRA contribution, the taxpayer will be taxed on the funds converted to the Roth IRA.

Another important consideration with BRCs is that these can only be successfully fully tax-free if the taxpayer does not have any funds in another IRA account. If the taxpayer has funds in other IRA accounts, the pro-rata rule applies. The pro-rata rule states that the IRS will view all of the taxpayers’ IRA accounts as one single, aggregate account (separate from spouse) for the purpose of calculating the taxable portion of BRC funds. The pro-rata rule includes pre-tax and after-tax funds. When the taxpayer wishes to convert a portion of this aggregate amount to a Roth IRA using a BRC, the taxpayer is not permitted to choose whether to convert pre-tax or after-tax funds to the Roth IRA. As such, the aggregate amount in pre-tax and after-tax funds is factored into the taxability calculation for BRCs, and a portion of the BRC will be taxable.

In using BRCs as a tax planning tool, it is important to consider anticipated tax brackets. If you anticipate your tax bracket will be higher in the future (or if rates are set to increase) and your income is too high to fund a Roth IRA directly, it might be beneficial to consider funding a Roth IRA through a BRC every year to benefit from the tax-free distributions from the Roth IRA later when your tax bracket is higher.

Please feel free to reach out to us with any questions if you are considering a Roth Conversion or Backdoor Roth IRA Conversion. We will be happy to assist you in determining if this IRA account funding option is a good fit for you.