It is generally understood that many American workers receive advice for retirement and when they start developing plans, they should consider contributing to employer-sponsored 401(k) and individual retirement accounts (IRAs).
NBC’s former NBC today shows how finance editor and Hermoney founder Jean Chatzky often answers questions about the challenges people face when saving and investing in retirement.
Recently, she was asked about one strategy for interesting strategies for dealing with IRA. She provides some financial details that many people who are ready to retire will be interested in exploring.
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Since pensions are no longer an important part of employers’ financial responsibility to workers, 401(k) has become the primary tool for people to fund retirement savings through this tool.
Workers often receive matching donations from the companies they work for because they put a percentage of their income into these accounts, which grow over time.
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Regarding investment in IRA, it is important to consider the benefits and differences between the two different types. Traditional IRAs involve tax-free donations, but pay taxes when withdrawing funds after retirement. Roth IRA contributions are pre-taxed, but evacuated after retirement.
But, is it possible to convert an existing traditional IRA to a Roth IRA for tax reasons? That’s the question to ask Chatzky – her careful answer is worth considering.
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Jean Chatzky warns converting assets from traditional IRA to Roth Iras
According to the Internal Revenue Service (IRS), the annual limit for a person to contribute to the IRA in 2025 is $7,000. People aged 50 and older can add another $1,000 as a catch-up donation, limiting it to $8,000.
For a traditional IRA, there is no limit to the amount of income a person can contribute annually. For the Roth IRA, the entire contribution from a single taxpayer is only allowed to earn less than $150,000. If a married application is submitted together, all donations earning less than $236,000 are allowed.
Many people at income levels want to put themselves in a financial position where they can pay as little taxes as possible during retirement. If they think the tax rate would be lower at the time, they often wonder if they could convert their traditional IRA to a Roth IRA.
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Chatzky explained that this is a problem she gets often, explaining that the strategy is also called the “backdoor Roth IRA.”
But Chatzky warns people that converting assets from traditional IRAs to Roth IRAs involves paying taxes on the amount of money people move when they move.
“What you don’t want to do is pull the money out of the safe haven of tax benefits and use that money to pay taxes,” Chazki wrote. “It may depend on your tax range, with more than 30% of the loss per dollar. It’s not the way to pay.”
Chatzky explained that the backdoor Roth IRA only makes sense to people outside of the IRA who have a lot of money to pay taxes.
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Jean Chatzky explains how tax rates affect traditional IRA to Roth IRA conversion
Chatzky urges people to think about this strategy to consider whether they think tax rates will increase or fall in the future, with the goal of paying as little taxes as possible.
“When we go with Roth, not tradition, it’s usually because we think tax rates are lower now and will go up in the future,” she wrote. “If you believe taxes will increase in the future in general – I personally have to say that I’m that belief, it’s beneficial to have at least some assets in Roth.”
Chatzky raises another point: With the Roth IRA, people never need to take money out, so they can pass it on to future families without taxing.
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