A common concern I hear from people five to 10 years away from retirement is the uncertainty of tax rates in the future.
Many people who have tax-deferred retirement accounts don’t know what percentage of their nest egg they will need to allocate for taxes. And required minimum distributions (RMDs), which begin at age 73, magnify their worry.
An effective way to reduce taxes in retirement is to do a series of Roth conversions over a span of several years while you’re still working. There’s no immediate gratification from it, but the long-term benefits can be worth the effort.
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With a Roth conversion, you transfer retirement funds from a traditional IRA or 401(k) into a Roth IRA.
Though you must pay taxes upfront on the money converted to a Roth — it is taxed as ordinary income — the advantage is you will be able to make tax-free withdrawals in the future (as long as you're 59½ and have held the account for at least five years).
Removing the tax burden of RMDs
A Roth conversion makes sense for investors who think they’ll be in a higher marginal tax bracket in retirement, which can happen if one has a substantial amount of money in traditional IRAs.
In such a case, RMDs can boost reportable income significantly. But whereas the IRS requires people to take RMDs from tax-deferred accounts, the IRS doesn’t require you to take RMDs from Roth accounts, because you’ve already paid taxes on the money in them.
Without RMDs to worry about and because Roth IRA distributions aren’t included in your taxable income in retirement, more money in a Roth account means a better chance of staying in a lower tax bracket.
A lower tax bracket also potentially reduces your Social Security taxes and Medicare premiums, which increase at higher income levels.
Roth rules for 2025
There are limits to the amount you can contribute to a Roth IRA: $7,000 for the 2025 tax year (those 50 and older can contribute another $1,000 as a catch-up contribution, for a total of $8,000).
It’s important to note that the Roth IRA contribution limits include the sum of all your IRA contributions in a given year.
If you put money into both a Roth IRA and a traditional IRA in the same year, the total combination can’t be over the annual limit.
How much you can contribute to a Roth IRA is determined by your tax-filing status and modified adjusted gross income (MAGI). Roth IRA income limits for the 2025 tax year are:
- If you are a single filer or someone who is married filing separately (if you didn’t live with your spouse at any point during the year) or filing as head of household and your MAGI is under $150,000, you can contribute the full amount.
- If your MAGI in one of those filing categories is $150,000 or more but less than $165,000, your contribution is reduced. A MAGI of $165,000 or more means you’re not eligible to contribute.
- For 2025, those married filing jointly or as a surviving spouse with a MAGI of less than $236,000 can make the full Roth IRA contribution.
- Those married filing jointly or as a surviving spouse with a MAGI of $236,000 or more but less than $246,000 get a reduced contribution. A MAGI of $246,000 or more means no contribution is allowed.
Estate planning: Protecting beneficiaries from the tax bomb
Contributions to Roth accounts provide long-term, tax-free growth and income, which benefits both the account holder and their beneficiaries. This approach also helps avoid passing significant tax burdens to heirs.
Spouses who are beneficiaries of a Roth account don’t have to take RMDs, while children who are beneficiaries will eventually have to take distributions — but they usually don’t have to pay any taxes on them.
Known as the 10-year rule, under the 2019 SECURE Act, most non-spousal beneficiaries must empty any inherited retirement account, including Roth IRAs, by the 10th anniversary of the original owner’s death.
Non-spousal heirs of traditional IRAs or 401(k)s must also pay income taxes on those withdrawals. But withdrawals from inherited Roth IRAs are generally tax-free.
So, one way to look at the legacy planning aspect of a Roth IRA is that the original owner is basically prepaying the taxes for their beneficiaries.
With looming uncertainties around future tax rates, starting Roth conversions well before retirement is prudent — ideally by the time someone is in their early 50s. Talk with a professional.
And make sure you know your tax rate before you start funding a Roth; if you're not careful, the amount you convert can throw you into a higher bracket.
Like many aspects of retirement planning, Roth conversions are about educating yourself and, at the same time, learning about tax implications in retirement.
For many people, funding a Roth account turns out to be the right move, allowing them to keep more of their hard-earned money in retirement.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Insurance products are offered through the insurance business Hanna Wealth Advisors.
Hanna Wealth Advisors is also an investment advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a registered investment adviser. AEWM does not offer insurance products. The insurance products offered by Hanna Wealth Advisors are not subject to investment adviser requirements. 02884275-03/25
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