A Comprehensive Guide to Roth IRA Conversions in 2024

For the year 2024, the maximum contribution limits for Roth IRAs and traditional IRAs are as follows:

$7,000 (or $8,000 if you’re aged 50 or older).
If your taxable compensation for the year is lower, your contribution cannot exceed that amount. (1)

What is a Roth IRA Conversion?

A Roth IRA conversion involves transferring funds from a traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. Since 2010, there have been no income restrictions preventing individuals from converting their traditional IRAs to Roth IRAs, making this option accessible to a broader range of taxpayers. (2)

Income Limits for Roth Contributions

In 2024, the following income limits apply for direct Roth IRA contributions:

Married Filing Jointly: If your income exceeds $240,000, you are not eligible to contribute to a Roth IRA.

Single Filers and Heads of Household: The cutoff is set at $161,000.

It’s important to note that there are no income limits when it comes to Roth conversions. (2)

Potential Tax Benefits of Roth IRA Conversions

One of the primary advantages of converting to a Roth IRA is the potential for tax savings in retirement. Although contributions to a Roth IRA do not provide an immediate tax deduction, the funds grow tax-free, and withdrawals during retirement are also tax-free. (2)

Withdrawal Rules

For individuals under 59½ years old, it’s recommended to keep the funds in the Roth IRA for at least five years before taking out earnings. If withdrawals are made before this period and before reaching age 59½, they may incur taxes and a 10% early withdrawal penalty, unless an exception applies.

If you are over 59½ but haven’t met the five-year requirement, earnings may be subject to taxes, but you won’t face penalties. (2)

Converting a Traditional IRA to a Roth IRA

A conversion from a traditional IRA to a Roth IRA may be advantageous under specific circumstances. For instance, if you've retired and anticipate higher income from withdrawals and Social Security, converting your traditional IRA may help manage your tax bracket. By switching to a Roth IRA, you can potentially mitigate future tax liabilities from higher income levels. (2)

Converting a 401(k) to a Roth IRA

Rolling over a traditional 401(k) to a Roth IRA often involves tax implications, primarily because of the differences in how these accounts are funded:

Traditional 401(k): Contributions are made with pre-tax income, meaning you don’t pay taxes until you withdraw funds.

Roth IRA: Funded with post-tax dollars; you pay taxes on contributions upfront.

Thus, when you roll over a traditional 401(k) into a Roth IRA, it’s important to recognize that you will incur taxes in the year of the conversion. (3)

SECURE 2.0 Act: Converting a 529 Plan to a Roth IRA

In December 2022, the SECURE 2.0 Act introduced provisions allowing for limited rollovers from 529 college savings plans to Roth IRAs, effective January 1, 2024. This flexibility is beneficial for those whose 529 funds are no longer needed due to various reasons, such as a scholarship or a change in educational plans. Key points of the SECURE 2.0 Act include:

The 529 account must be active for over 15 years.
The rollover amount must have been in the 529 for at least 5 years.
Annual rollovers are subject to the Roth IRA contribution limits (i.e., $7,000 for 2024; $8,000 for those aged 50 and older).
There is a lifetime limit of $35,000 for each beneficiary regarding these rollovers.
The rollover must go into a Roth IRA owned by the same beneficiary of the 529 plan.
Roth IRA income limits do not apply to these rollovers.(4)

Closing Thoughts

A Roth IRA conversion can be a beneficial retirement planning strategy, particularly if you anticipate higher taxes in the future. However, it’s essential to consider potential tax implications carefully, especially if you have multiple retirement accounts. Consulting with a qualified professional, such as an Investment Adviser Representative or Certified Public Accountant, can help provide tailored insights into whether a conversion aligns with your long-term financial goals.

Article Sources:

(1) “Retirement topics - IRA Contribution Limits.” IRS.gov, August 20, 2024.

(2) Folger, Jean. “Roth IRA Conversion: How It Works, Plus the Pros and Cons.” Investopedia, September 6, 2024.

(3) Pareto, Cathy. “Must-Know Rules for Converting Your 401(k) to a Roth IRA.” Investopedia, September 9, 2024.

(4) “How unused 529 assets can help with retirement planning.” Fidelity Viewpoints, May 22, 2024.