We make over $350,000 a year and cannot contribute to a Roth IRA. Do we have to wait until we retire to do Roth conversions?

Because of our income bracket—we make over $350,000 a year—we can no longer contribute to a Roth. We are 61 and 62 and plan to work until at least 67. We qualify to convert our 401(k)s to Roths a little at a time or do we have to wait until we retire?

– Fariba

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

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

Roth IRA income limits

Let’s provide the relevant background information for readers unfamiliar with Roth IRA contribution eligibility. Your income must be below certain thresholds 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 filing jointly 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 exceeding $240,000 cannot contribute to a Roth IRA.

One important thing to understand about these income limits is that they only apply to your ability to make direct contributions to your Roth IRA – not if you can perform a Roth conversion. (But if you need additional guidance about contributing to a traditional or Roth IRA, talk to a financial advisor.)

Roth vs. Contributions CONVERSION

It may be helpful here to clarify the difference between a Roth conversion and a Roth contribution. A conversion involves moving money that’s already held in 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 to a Roth account. Of course, you should know that when you convert you must include the conversion in your taxable income for the year you convert.

The story continues

Roth 401(k) contributions.

It’s also important to note 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 Roth contributions, you can make the full contribution up to the annual limit in a designated Roth account, regardless of your income.

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

Starting conversions now vs. On hold

Whether or not you and your spouse decide to start rolling over your 401(k) balances now or wait until you retire depends largely on what you expect your marginal tax rate to be. Roth accounts also offer 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 probably a prudent choice. But if your estimated future tax rate will be lower than your current tax rate, it’s probably better to wait.

The general 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, this will happen after they retire and cease to have income, but this is not universal. If most of your savings are tax-deferred and you don’t expect your income to drop in retirement, then you may not see a drop. I’m not advocating guessing, but you have to make that decision based on estimates of unknown future 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 return to pre-2018 levels unless extended by legislation. (A financial advisor may not be able to predict future tax rates, but they can help you plan your taxes.)

Flexibility

Avoiding required minimum distributions (RMDs) is another important reason why you may choose to start conversions now. You are required to begin making at least one specified minimum withdrawal from tax-deferred accounts each year once you reach the 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. Because Roth accounts are not subject to RMD rules, conversions can give you more flexibility to withdraw how you choose in retirement. (A financial advisor can also help you plan for RMDs.)

Conclusion

Exceeding the Roth IRA income limit prevents you from contributing directly to a Roth IRA, but that’s about it. You can convert any amount, at any time and for any reason, from a tax-deferred retirement account to 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 timing is critical. Converting in a year when your income is lower can reduce the tax impact because the converted amount is treated as taxable income. However, converting too much at once can push you into a higher tax bracket. It is important to consider your current and future tax situation before making a decision.

• Roth conversions can be complex and the tax implications are significant. It is wise to consult a financial advisor to ensure you are making the best decision for your financial situation. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a SmartAsset AMP participant. He was compensated for this article. Some questions submitted by readers are edited for clarity or brevity.

Photo credit: ©iStock.com/designer491, ©iStock.com/SDI Productions

The post Ask an Advisor: We Make Over $350,000 a Year and Can’t Contribute to a Roth IRA. Do we have to wait until we retire to do Roth conversions? appeared first on SmartReads by SmartAsset.