Roth Contributions vs. Conversions: Why They Matter

In this October 2025 article, Dan Frost hit on some of the big picture items related to the OBBBA and Roth conversions. Now we are going to double-click on a few guidelines that may help you think more strategically about how to move money into Roth dollars over time.

As is the case with many financial decisions, there is not a slam dunk, black and white grid where you plug in your numbers and it spits out a definitive answer. There are a lot of gray areas. A thoughtful financial plan and an ongoing conversation with your lead advisor is always the best route to determine what is best for you.

Why Roth Dollars Matter

The larger your pretax or tax deferred balance, the more those dollars can compound over time. That is a good thing in many respects, but it also means that when Required Minimum Distributions begin (generally age 73 today but are scheduled to move higher over time), the distributions and taxation can be substantial. Higher taxable income can affect Medicare premiums through IRMAA surcharges and can limit your ability to manage income in a tax efficient way. Paying some tax today at known rates can create flexibility later when you may have fewer levers to pull.

There is also a generational planning component. Under current rules, most non-spouse beneficiaries must fully distribute inherited IRAs within ten years. If your children or other beneficiaries are in their peak earning years, those required withdrawals could be taxed at higher marginal rates than what you would have paid had you converted some of those dollars during your lifetime. Thinking about who ultimately pays the tax, and when, is an important part of the equation.

Direct Roth Contributions

One of the simplest ways to build Roth dollars is through direct contributions. If your joint income is less than $242,000, you can fully contribute $7,500 per year as of the 2026 tax year to a Roth IRA, regardless of whether you are actively contributing to a 401(k) plan. That is often the cleanest starting point.

If your income is higher than $242,000 but you participate in a 401(k), many plans now offer a Roth 401(k) option. Inside the 401(k), income thresholds do not apply, so even high earners can direct some or all their elective deferral, up to $24,500 as of the 2026 tax year, into the Roth side of the plan. Over time, consistently choosing the Roth option can meaningfully shift the future tax profile of your retirement assets.

Roth Conversions and Tax Brackets

Beyond contributions, Roth conversions are a powerful planning tool. As a general guideline, when reviewing the current tax code for married couples filing jointly, one of the more meaningful jumps in marginal rates occurs when taxable income moves from the 24% bracket to the 32% bracket, which currently happens at $403,350 of taxable income. That means income, including any converted amount, up to that level is taxed at 24 percent or less. For many households, that becomes a practical sweet spot to evaluate conversions.

A critical piece of the math is having cash outside the IRA to pay the tax bill. Using the converted funds themselves to cover taxes reduces the long-term benefit of the strategy and can undermine the compounding advantage you are trying to create.

When Conversions Can Be Especially Attractive

There are certain seasons of life when conversions can be especially attractive. Temporary low-income years, such as during a job transition, a year with business losses, or early retirement before Social Security begins, can create windows where your marginal tax rate is lower than it may be later. Market declines can also present opportunities. If your IRA balance is temporarily depressed due to a pullback, converting at that time allows the eventual recovery to occur in a tax-free environment.

Households with significant cash reserves, proceeds from a business sale, an inheritance, or large taxable account balances may also have more flexibility to pay the tax on a conversion without disrupting their broader financial plan. In those situations, the ability to write a check to the IRS from outside the IRA meaningfully improves the long-term math.

Asset Location and Optionality

Another approach we often employ is asset location, which can provide optionality without necessarily creating an immediate tax bill. This strategy is most relevant for individuals who already have large pretax balances along with some Roth or taxable brokerage assets. Asset location simply means placing higher expected growth assets in more tax advantaged accounts and lower growth or income-oriented assets in less tax advantaged accounts. An additional motivation is keeping the household’s overall stock to bond mix aligned with the financial plan, but to locate the growth in accounts where the tax treatment is most favorable

For example, equities with higher long term growth potential might be placed inside a Roth IRA, where future appreciation can occur tax free, while bonds or more income focused holdings may sit in a traditional IRA. Over time, this can increase the proportion of wealth that compounds in a tax efficient manner.

Final Thoughts

In short, there is no shortage of ways to approach this. What we do know is that the tax bill is coming at some point, either for you or for your beneficiaries. The question is not whether taxes will be paid, but when and at what rate. Thoughtful planning around contributions, conversions, and asset location is our way of helping you keep as much of your hard-earned money working for you and your family as possible.

Contact us today if you’d like to discuss your situation in more detail or you have questions about this post.