When it comes to saving for retirement, it’s not just about how much you save—it’s also about where you save it. Choosing between a Traditional IRA or 401(k) and a Roth IRA or 401(k) can have a big impact on your taxes, both now and in retirement. On top of that, there’s a powerful tool called a Roth conversion that can shift your savings strategy and potentially reduce your lifetime tax bill. But it’s not right for everyone.

Here’s what you need to know to make informed decisions about your retirement accounts and how to evaluate whether a Roth conversion is right for you.

Understanding Traditional IRAs and 401(k)s

Traditional retirement accounts offer an immediate tax break. Contributions to a Traditional IRA or 401(k) are generally made with pre-tax dollars, which can reduce your taxable income in the year you contribute. Your investments then grow tax-deferred, meaning you don’t pay any taxes until you withdraw the money in retirement. At that point, withdrawals are taxed as ordinary income.

Anyone with earned income can contribute to a Traditional IRA, but whether those contributions are tax-deductible depends on your income and whether you or your spouse are covered by a retirement plan at work. Traditional 401(k) plans are offered through employers and are available to all eligible employees, regardless of income.

Eventually, the IRS requires you to start taking money from your Traditional IRA or 401(k). These are referred to as required minimum distributions (RMDs), and begin at age 73 (as of 2025). The IRS sets the amount you must withdraw annually, and you’ll owe income tax on each distribution.

Understanding Roth IRAs and Roth 401(k)s

Roth accounts work the opposite way. You contribute after-tax dollars—so there’s no immediate tax deduction—but the money grows tax-free, and qualified withdrawals in retirement are also tax-free. That can be a huge advantage if you expect to be in a higher tax bracket in the future or want to reduce your taxable income later in life. One of the key benefits of a Roth IRA is that qualified withdrawals do not count as taxable income. In addition, they do not count toward the formula the IRS uses to determine whether (and how much of) your Social Security benefits are taxable (up to 85% of your Social Security benefits can be taxable, depending on your income in a given year).

Roth IRAs are subject to income limits. In 2025, individuals earning under $150,000 (or married couples under $236,000) can make full contributions (above those thresholds, there are phaseouts). Roth 401(k)s, however, are offered through employers and don’t have income limits, making them a valuable option for higher earners.

One big benefit of Roth IRAs is that they do not require RMDs during the account holder’s lifetime. This gives you more control over your withdrawals and allows the money to potentially grow tax-free for decades. Roth 401(k)s do have RMDs, but you can avoid them by rolling the funds into a Roth IRA.

What Is a Roth Conversion?

A Roth conversion lets you take money from a Traditional IRA or 401(k) and move it into a Roth IRA. When you do this, you’ll owe income tax on the amount converted—but once the money is in the Roth, it can grow and be withdrawn tax-free down the road.

There are no income limits for Roth conversions, which means anyone can do one. Traditional 401(k) funds can be converted too, although it usually requires rolling them into an IRA first.

Why Consider a Roth Conversion?

Roth conversions can make a lot of sense under the right circumstances, but they’re not for everyone. Here are some scenarios where it might be worth considering:

-- If you expect your tax rate to go up in the future—either because of rising tax laws, your income increasing, or just because your filing status changes—it may make sense to pay taxes now at a lower rate. Converting during low-income years, such as after retirement but before RMDs kick in, is often ideal. While of course the future is uncertain, in light of rising annual deficit spending and the ever-accumulating debt load and unfunded liabilities of the federal government, many Americans see it as inevitable that tax rates must rise in the future as a result.

-- Another key factor is how long you plan to leave the money invested. Roth conversions generally benefit those who have a long time horizon before needing the money, allowing more time for tax-free growth to offset the upfront tax cost.

-- You’ll also want to think about how you plan to pay the taxes on the conversion. The best-case scenario is using money from outside your retirement account to pay the tax bill. Using retirement funds to pay the taxes can reduce the benefits of the conversion.

-- Roth conversions are also worth exploring if you’re thinking about legacy planning. The SECURE Act (which went into effect in 2020) eliminated the "stretch IRA" for most non-spouse heirs, requiring them to withdraw all inherited IRA funds within 10 years of inheriting the IRA. That means your heirs could end up with a big tax bill. Roth IRAs still have to be emptied within 10 years, but heirs won’t owe income tax on the withdrawals—making Roth assets a more tax-efficient inheritance.

-- Finally, a Roth conversion can help reduce future RMDs. By converting some funds to a Roth, you’ll shrink the balance in your Traditional IRA or 401(k), which in turn reduces the amount you’re required to withdraw each year once RMDs begin.

When a Roth Conversion Might Not Make Sense

If you’re already in a high tax bracket and expect to be in a lower one later, converting now could mean paying more tax than necessary. And if you need to use the converted funds within five years, you may run into tax penalties unless you’re over 59½ and meet the Roth IRA withdrawal rules.

It’s also important to consider the ripple effects of extra taxable income. A large conversion could increase your Medicare premiums (through the IRMAA surcharge) or reduce income-based benefits like ACA health subsidies. Timing matters.

How to Evaluate a Roth Conversion

Rather than converting everything all at once, many people choose to do partial conversions over several years, staying within a specific tax bracket. For example, you might convert just enough each year to fill up the 22% or 24% federal bracket, without spilling into a higher one (strangely, the next federal tax bracket is 32%, a very large jump from 24%, which incentivizes being careful to keep within the right bracket). This “bracket management” strategy can help balance the upfront tax cost with long-term tax savings.

It’s smart to model a few scenarios using tax software or with a financial advisor. The right strategy often depends on your age, current income, future income expectations, retirement plans, legacy goals, and how much you have in each type of account.

The Bottom Line

Traditional and Roth accounts both offer powerful benefits—but in different ways. A Roth conversion can be a valuable tool to reduce future taxes, avoid RMDs, and leave a more tax-efficient inheritance. But it’s not a one-size-fits-all solution. If you’re nearing retirement, have irregular income years, or want more control over your future taxes, it’s worth taking a closer look.

As always, consult with a financial planner or tax advisor before making any big moves. The goal is to make sure your strategy works not just for this year’s tax return, but for the decades ahead.

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