Because of our income bracket – we make over $350,000 per year – we cannot contribute to a Roth anymore. We’re 61 and 62, and planning to work until at least 67. Do we qualify to convert our 401(k)s into Roths a little at a time or do we have to wait until we retire?

-Fariba

You’re right that earning a combined income of $350,000 puts you over the Roth IRA income limit. However, there’s no income limit on conversions. In fact, anyone can convert any amount of tax-deferred savings at any time. Nothing is stopping you from converting some of your tax-deferred retirement savings now. However, deciding whether to do it now vs. in retirement can significantly impact the taxes you end up paying on the money.

A financial advisor can help you decide whether a Roth conversion makes sense for you. Connect with an advisor today to talk about it.

Roth IRA Income limits

Let’s provide the relevant background information for readers who may not be familiar with Roth IRA contribution eligibility. Your income must be below certain thresholds in order to contribute to a Roth IRA. The limits adjust each year, but for 2024:

Single filers can contribute the maximum amount to a Roth IRA if their modified adjusted gross income is less than $146,000. Higher income levels reduce your allowable contribution. Once your modified AGI reaches $161,000, you can no longer contribute to a Roth IRA.
Married couples who file a joint return can make a full contribution to a Roth IRA if their combined modified AGI is less than $230,000 and a reduced Roth contribution if their combined income is between $230,000 and $240,000. However, married couples who file jointly and have a combined income that exceeds $240,000 cannot contribute to a Roth IRA.

An important thing to understand regarding these income limits is that they only apply to your ability to make direct contributions into Roth IRAs – not whether you can execute a Roth conversion. (But if you need further guidance on whether to contribute to a traditional or Roth IRA, talk it over with a financial advisor.)

Roth Contributions vs. Conversions

Roth conversions can be an effective way to save on taxes in retirement.

It may be helpful here to clarify the difference between a Roth conversion and a Roth contribution. A conversion involves moving money that is already held inside a tax-deferred account – such as a traditional IRA or 401(k) – into a Roth IRA.

There is no limit of any kind that restricts your ability to move or convert money from a tax-deferred account into a Roth account. Of course, you need to be aware that when you do you must include the conversion in your taxable income for the year in which perform the conversion.

Roth 401(k) Contributions

It’s also important to point out that the Roth IRA income limit does not apply to workplace retirement plans, such as 401(k)s and 403(b)s. If your employer plan allows for Roth contributions, you can make the full contribution up to the annual limit into a designated Roth account regardless of your income.

I sometimes think of this option as hiding in plain sight. So many people who are restricted due to the income limit simply don’t know this choice is available. (And if you need help with a conversion or want some guidance on how much to contribute to a Roth account, a financial advisor can potentially help.)

Starting Conversions Now vs. Waiting

A woman and her husband look over their 401(k) account balances and contemplate a series of Roth conversions.

Whether or not you and your spouse decide to start converting your 401(k) balances now or wait until you retire largely depends on what you expect your marginal tax rate to be. Roth accounts also provide tax flexibility in retirement, which may be important to you.

Comparative Tax Rates

If you think your current tax rate is lower than it will be in the future, starting to convert your money now is likely a prudent choice. But if your estimated tax rate in the future will be lower than your current tax rate, it is likely better to wait.

The overarching idea is that it makes the most sense to convert tax-deferred accounts when your tax rate is the lowest you expect it to be.

For many, that will be after they retire and they stop earning income, but that is not universally the case. If the majority of your savings are tax-deferred and you don’t expect your income needs to fall in retirement then you may not see a drop. I don’t advocate guessing, but you have to make that decision based on some estimate of future unknown tax rates.

This year and next year present a unique situation while the Tax Cuts and Jobs Act is still in effect. After 2025, tax rates will revert to their pre-2018 levels, unless they are extended through legislation. (A financial advisor may not be able to predict future tax rates, but they can potentially help you plan around taxes.)

Flexibility

Avoiding required minimum distributions (RMDs) is another significant reason you may choose to start your conversions now. You are required to begin taking at least a specified minimum withdrawal from tax-deferred accounts each year once you reach RMD age. For people born before 1960, RMDs begin at age 73. For those born in or after 1960, they start at age 75.

RMDs can reduce the flexibility you have to choose how and when you make withdrawals from your accounts. Since Roth accounts are not subject to RMD rules, conversions can provide you with more flexibility to withdraw how you choose in retirement. (A financial advisor can help you plan for RMDs, as well.)

Bottom Line

Exceeding the Roth IRA income limit prevents you from contributing directly to a Roth IRA, but that’s about all it does. You can convert any amount, at any time and for any reason, from a tax-deferred retirement account into a Roth account. You can also contribute directly to Roth accounts within your employer-sponsored retirement plan.

Roth Conversion Tips

Roth conversions can be a powerful tool for long-term tax planning, but it’s essential to carefully consider the timing. Converting during a year when your income is lower can reduce the tax impact since the amount converted is treated as taxable income. However, converting too much at once could push you into a higher tax bracket. It’s important to analyze your current and future tax situation before making a decision.
Roth conversions can be complex, and the tax implications are significant. It’s wise to consult with a financial advisor to ensure you’re making the best decision for your financial situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

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