The Roth IRA was created in 1997, and over the years, it has evolved into an integral part of the retirement landscape.
So much so that we think that a Roth IRA may be worth a second look if it’s been a while since you last did some looking around.
The Fundamentals
How a Roth IRA Works
Contributions to a Roth IRA are made with after-tax dollars; therefore, when you take qualified withdrawals in retirement, you do not pay any taxes on earnings.
How a Roth Conversion Works
When you convert a traditional IRA to a Roth IRA, for example, the amount you convert is considered taxable income in the year you make the change. But after that, because you don’t pay taxes on qualified withdrawals from your new Roth IRA, you have more flexibility to manage your taxes. Plus, because the original owner does not have to make a required minimum distribution, this can create estate strategy opportunities.
“In today’s US society, far too many people don’t want to accept responsibility for their financial well-being,” writes Mick Owens, author of the popular book Diamond of Life: The Five P’s of Success and Significance. “God owns everything. He allows us to manage what He has created!”
Q&A Session1
Here are a few common questions we hear from people who are considering making a move to a Roth IRA with their retirement money.
Did the One Big Beautiful Bill (OBBB) have anything for Roth IRAs?
Yes, but it’s a bit hidden. Thanks to the OBBB, seniors 65 and older are eligible for a new temporary “senior bonus” of up to $6,000 ($12,000 for a married couple). This extra deduction can help with a Roth conversion because it creates more space for you to manage your taxes. If you’re 62-64—and considering a Roth conversion—you might want to begin preparations because the deduction ends after 2028
Pro Tip: One option to consider is doing a series of smaller, partial conversions over several years to help manage your tax situation.
Can I convert my pension into a Roth IRA?
Yes, you can take a lump-sum distribution and roll it into a Roth IRA, provided that your employer’s plan has that option. Keep in mind that you’ll have to pay income taxes on the rollover amount during the year of the conversion.
Can I convert my 401(k) to a Roth IRA?
Yes, you can do this once you are retired—or while you’re still working, if your plan permits in-service withdrawals.
Pro tip: You can convert your 401(k) either through a direct rollover to a Roth IRA or by rolling funds over to a traditional IRA and then converting it to a Roth IRA.
What’s a partial Roth IRA conversion?
A partial conversion occurs when you move only a portion of your funds. Some like this approach since it allows you to manage your total tax bill.
Does it matter what time of year I convert?
Yes and no. If you convert earlier in the year, you have more time to pay taxes. For example, if you convert in January, you’ll have until April of the following year–15 months–to settle with Uncle Sam. But if you convert later in the year, you’ll have more information about your total income for the year and your tax bill.
How can I estimate my tax bill for a conversion?
Your tax bill will be based on two factors: the taxable income generated by the conversion and your applicable tax rate. You’ll need to know whether you made pre-tax (i.e. deductible contributions) or after-tax (i.e. nondeductible contributions). The IRS says you cannot cherry-pick and convert only your nondeductible contributions, while leaving your deductible contributions and earnings in the account.
Anything else I should know about?
To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding period and occur after age 59½. In certain circumstances, such as the owner’s death, tax-free and penalty-free withdrawals can also be taken. Keep in mind that the original Roth IRA owner is not required to take minimum annual withdrawals, so this can have estate management implications.
Also, after reaching age 73, you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals are taxed as ordinary income, and if taken before age 59½, a 10% federal income tax penalty may apply.
How do we approach a Roth conversion?
As we help people think through a Roth conversion, we focus on a wide range of issues, including tax considerations, estate management, and retirement income. It’s critical to look at your situation from a variety of perspectives so that you can see the whole impact of making a move to a Roth.
If needed, we will bring in cfd Tax Preparation & Bookkeeping services, as they can provide an estimate of the tax liability and can offer some insights regarding the schedule of tax payments that might be necessary. It’s critical to prepare ahead of time so that we understand where the money would be coming from for any required tax payments.
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www.fidelity.com, 2025
