The views expressed are those of Anchor Capital Advisors, LLC (“Anchor”) and are subject to change at any time. They are based on our proprietary research and general knowledge of said topic. The below content and applicable data are in support of our views on said topic. Please see additional disclosures at the end of this publication.
TRADITIONAL IRAS VS. ROTH IRAS
You must first understand the differences between “traditional” retirement accounts and Roth retirement accounts before deciding if a Roth conversion makes sense for you.
TRADITIONAL RETIREMENT ACCOUNTS
A “traditional” retirement account is a tax-advantaged account that allows you to contribute money on a pre-tax basis based on your earned income. The most common types of traditional retirement accounts are offered through your employer (i.e., 401(k), 403(b)) or set up independently (IRA account).
Contributions to these accounts are deducted from your income, so you get an immediate tax benefit for the contribution. Furthermore, the earnings on the account are not taxed, so the account balance can grow tax deferred. You are only taxed when you make distributions from the account. Once you reach a certain age (currently 73), the tax code requires you to start making withdrawals. [1] These are known as Required Minimum Distributions (RMDs), which are calculated based on your age and the balance of your IRA account at the end of each year.
ROTH RETIREMENT ACCOUNTS
A Roth retirement account is another type of tax-advantaged account that allows you to contribute money based on your earned income. The earnings and growth are also not taxed while the assets are in the Roth account. However, unlike a traditional account, you do not receive a deduction for your contributions into a Roth account.
Rather, the primary benefits of the Roth account are:
- There are no taxes on distributions from the account (provided the account has been open for 5 years), and
- There are no RMD requirements.
There are several different ways to contribute directly to a Roth. You can contribute to an employer plan if the retirement plan allows Roth contributions—not all of them do. You can also contribute to a Roth IRA if your income is below certain income limits. For 2025, you can contribute up to $7,000 to a Roth IRA ($8,000 if 50 or older) [2] if your modified adjusted gross income is $150,000 or below ($236,000 or below for married couples filing jointly). [3] A partial contribution is allowed if your income is between $150,000 and $165,000 (between $236,000 and $246,000 for married taxpayers filing jointly).
For those unable to contribute directly to a Roth or have already accumulated assets in a traditional pre-tax retirement account, you are still able to contribute to a Roth account by making a Roth conversion.
WHAT ARE ROTH CONVERSIONS?
Roth conversions are transactions where a person with assets in a traditional retirement account transfers some or all those assets into a Roth account. The conversion is generally taxable in the year it is made but is not subject to the early withdrawal penalty so long as the entire amount is rolled into the Roth account. [4] Anything converted to a Roth account must stay in the account for 5 years before it is withdrawn, otherwise taxes and penalties may apply. [5]
WHY WOULD YOU CONSIDER A ROTH CONVERSION?
HIGHER THAN EXPECTED FUTURE TAX RATES/LOW CURRENT INCOME
A common reason to consider Roth conversions is that you expect your future tax rates to be higher than the year you are considering the Roth conversion. Part of the reason for the higher expected future tax rates is required minimum distributions (RMDs)—traditional IRAs require account holders to make annual distributions starting at age 73. The RMD is calculated based on the taxpayers age and the traditional account balance. The higher the account value, the higher the distribution. When combined with Social Security, pensions, and other income sources, the RMDs may push you into higher tax brackets.
TAX DIVERSIFICATION
You may also consider a Roth conversion to protect against the uncertainty of future changes to the tax laws. We know what the law is now, but the law can always change. For example, the last major change to the tax code was 2017, when tax rates were reduced, income brackets were widened, and there were significant changes to rules relating to the standard and itemized deductions. These changes are set to expire at the end of 2025 and revert to the law in effect before 2017 which will occur if Congress does not act to extend the 2017 reforms. Alternatively, Congress can decide to do something completely different which is the path they are currently negotiating in the U.S. Senate. The final outcome is expected to be clear in early July.
Converting money from a traditional IRA to a Roth IRA in a year when the tax benefit is clear can help mitigate the risk of future tax law changes.
ESTATE PLANNING
A Roth conversion can also help in your estate planning by passing along assets to your beneficiaries in the most tax efficient way possible. While original owners of a traditional retirement account are required to take RMDs over their remaining life expectancy, most beneficiaries are required to deplete an inherited IRA account within 10 years of inheriting the account. These distributions will be taxable to the beneficiaries. Depleting the account over a shorter period could push the beneficiaries into high tax brackets.
Meanwhile, beneficiaries of Roth distributions will not be taxed on their distributions. The same general distribution rules apply to Roth beneficiaries, such as depleting the account over a 10-year period. Unlike inheriting a traditional retirement account, Roth account beneficiaries are not also inheriting an embedded tax liability on the account balance.
The original owner of a traditional account can use Roth conversions in their estate planning in 2 main ways:
- Converting a traditional account to take advantage of low-tax years to reduce or eliminate the income tax burden inherited by a beneficiary. This can be done in a single year, or over several years, depending on your unique tax situation.
- By paying the income tax on a Roth conversion during the original owner’s life, the original owner is also reducing the value of their taxable estate by the amount of income tax paid. Therefore, for people that are potentially subject to federal or state estate taxes, making the Roth conversion can also help reduce the estate taxes owed on their estate, thus leaving more of their estate to their beneficiaries.
These two benefits can work together—helping reduce both income and estate tax burdens. However, the impact of a Roth conversion strategy depends on many factors, so a personalized analysis is essential to evaluate potential tax savings.
IS A ROTH CONVERSION RIGHT FOR YOU?
The decision to make a Roth conversion depends on many factors, including:
- Tax outlook: current vs. expected future tax brackets.
- Balance sheet: how much do you have saved between taxable accounts, traditional retirement accounts, and Roth retirement accounts?
- Liquidity: do you have cash, or can you sell assets with little-to-no tax impact, to pay the tax due on the Roth conversion?
- Long-term financial outlook.
These are just a few key variables you should look at to determine if and when a Roth conversion is appropriate. The private client team at Anchor can help guide you in this decision and determine whether a Roth conversion is right for you.
[1] 26. U.S.C. §401(a)(9)(C)
[2] https://www.irs.gov/pub/foia/ig/spder/ts-21-1124-1129.pdf
[3] https://www.irs.gov/pub/irs-drop/n-24-80.pdf
[4] 26 U.S.C. §408A(d)(3)(C)
[5] 26 U.S.C. §408A(d)(2)(B)
[6]26 U.S.C. §401(a)(9)(H)
The views expressed are those of Anchor Capital Advisors, LLC (”Anchor”) as of May 2025 and are subject to change at any time. Anchor does not undertake any obligation to update the information contained herein as of any future date, nor does it have liability for decisions based on this information. Certain information (including any forward looking statements and economic and market information) has been obtained from sources we deem reliable, but is not guaranteed by Anchor, nor is it a complete summary of available data. This publication has been prepared by Anchor Capital Advisors, LLC (Anchor). The information is for educational purposes only and should not be considered investment advice or a recommendation of any particular strategy or investment product. These opinions are not intended to be a forecast of future events or a guarantee of future results. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Anchor. Past performance is not guarantee of future results. Inherent in any investment is the possibility of loss.