Episode Transcript
Roth IRAs -- want in, but make too much money? There are still some ways to take advantage of the account. This is Fidelity's Money Unscripted with Leanna Devinney, Fidelity Market Leader, and me, Ally Donnelly.
Today, we're digging into Roth conversions, the backdoor Roth, and the mega backdoor Roth.
Leanna, let's jump right in. Why would I want to consider one of these strategies, either a Roth conversion or a backdoor Roth?
There are some great benefits to Roth. The three that come to mind are having potentially tax-free withdrawals in the future, no minimum required distributions needing to be taken from a Roth account.
An RMD.
An RMD. And the third is tax diversification, meaning different tax treatments for your Roth versus your traditional IRA, which may be advantageous.
OK, perfect. So let's start with a Roth conversion. How does it work?
So anyone can do this as long as it's appropriate for your situation. And essentially, you are converting tax-deferred money from your IRA account to a Roth IRA account. So when you do that conversion, it triggers a tax bill in the year that you're converting-- taking money from the traditional IRA, paying taxes, and converting it to the Roth IRA account.
Keep in mind, this could push you into a higher tax bracket. So you do want to be careful and certainly consult with a tax advisor if this is appropriate for you. But again, the benefits are that it reduces the amount that you have to take out later as part of those required minimum distributions.
You're also adding more money into a Roth account that is potentially tax-free withdrawals later. And Roths are a great way to leave a legacy. So if you want to be giving to your loved ones, them inheriting money that they don't have to pay taxes on in today's tax environment may be advantageous.
So if you can afford it, you may want to pay the taxes now?
Yes. If you can afford to pay the taxes now, this may be a great advantage to your situation because it gives you the benefits of a Roth. And one of those great benefits is the tax treatment of your retirement dollars.
OK. What are some of the questions I should ask myself before I consider a conversion?
So can you pay the taxes now would be a big one. The second is, what will your tax bracket potentially be in retirement? This may be a harder one to answer. But if you anticipate still being in a high tax bracket, it could be very advantageous to have money in a Roth account.
And the last is making sure you give yourself enough of a timeline. The advantages of a Roth is having money invested with time. And for Roth, it's five years is the amount of time before you can take money out potentially tax-free.
OK. What about a backdoor Roth?
So backdoor Roth is a little bit different than a Roth conversion.
I feel like just when I've got a Roth conversion down, I'm like, backdoor.
[LAUGHTER]
I know, and you're not alone. So a backdoor Roth is when you've actually phased out of the income limits to go directly to the front door and contribute directly to a Roth account.
Meaning I make too much money to go in the front door.
Exactly.
OK.
So a backdoor Roth is putting a non-deductible contribution into a traditional IRA, meaning that we're not going to get a tax deduction on that contribution. And then we take that non-deductible contribution, and you want to immediately transfer or convert it to a Roth IRA account.
OK.
That part's important because we don't want the money to have any earnings and grow in the traditional IRA account. It's a straight shot-- non-deductible contribution to your traditional, directly to your Roth account.
So how do I decide between a conversion or a backdoor? What's the difference between the two?
So keep in mind a conversion, anyone can do. And there's no limit to how much you can convert. So the conversion is money that's already in your traditional IRA account. This is money that is tax-deferred, that we're choosing to pay taxes now and convert it to a Roth IRA. There's no limitation to how much. But remember, you're paying taxes on that. A backdoor Roth has contribution limits. The contribution limits today for 2026 is $7,500.
OK. What about a mega backdoor Roth? What is that?
So mega backdoor Roth is very similar to the backdoor Roth, except now we're talking about your workplace plans. So think your 401(k). And for these, you want to check with your employer if your plan allows this.
OK.
This is taking an after-tax contribution to your 401(k) and converting it to a Roth IRA account.
OK. So same steps, it's just into your 401(k) to begin with.
Exactly. And not all plans allow this. So best to check with your employer.
Any tax implications I should know about?
There could be tax implications and always best to consult with a tax advisor.
So big picture. What do you hope someone listening to this takes away for Roth conversions and backdoor Roths?
So it's the value of what a Roth can provide. So back to those benefits again. So it's the potential for tax-free withdrawals. It's potentially eliminating the required minimum distributions. And the third is that tax diversification-- so creating different tax treatments of your wealth.
I've worked with many investors over the years, and we always get questions around, how am I going to take income in retirement? What will taxes be like? And how am I going to make sure I leave a legacy to my loved ones? And the benefits of a Roth may help with those questions.
Awesome. Leanna, thank you so much.
Thank you. Thank you for having me.
We have more resources on backdoor Roths and Roth conversions, including a Roth conversion calculator, on our website. It's Fidelity.com/MoneyUnscripted. Be sure to like, follow, subscribe to the podcast, and we'll see you next time on Money Unscripted. It's your life. Get your money's worth.
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[Disclosures]
Investing involves risk, including risk of loss.
A distribution from a Traditional IRA is penalty-free provided certain conditions or circumstances are applicable: age 59½; qualified first-time homebuyer (up to $10,000); birth or adoption expense (up to $5,000 per child); emergency expense (up to $1000 per calendar year); qualified higher education expenses; death, terminal illness or disability; health insurance premiums (if you are unemployed); some unreimbursed medical expenses; domestic abuse (up to $10,000); substantially equal period payments; Qualified Federally Declared Disaster Distributions or tax levy.
For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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