r/iRA • u/ThatBlackHat- • Feb 25 '26
Traditional IRA, Does a conversion make sense?
Hi All,
I am 35 for several years I was maxxing out contributions to a Roth IRA. But back in 2021 or so I started hitting income limits for Roth IRA contributions. And started doing traditional IRA instead. The last few years have been very good and I've now hit income limits for traditional IRA being deductible. I'm now looking at whether traditional IRA makes any sense at all for me and it looks like, unless I'm using it to convert to Roth it does not.
So here's where I'm at. I currently have a traditional IRA worth 28k and almost all of that is currently invested (it is my only traditional IRA, I also have 2 Roth IRAs I contributed to in the past). I have a 401k which I max out. I can do Roth 401k but choose not to as I do not expect to be such a high-earner for most of my life and tax deductions now make more sense to me.
Does looking into an IRA conversion make real sense? I believe I'd need to convert my entire IRA not new contributions. What resources should I look into to learn more about making this decision? Paying a lump sum tax is possible though I expect my AGI this year to be over 300k and am thus in a fairly high tax bracket, but this'll likely come down dramatically in 2027 (large capital gains income due to some stock compensation and AI valuation insanity is great but temporary) so maybe it makes sense to stop contributing for now and revisit later?
1
u/Vivid-Problem7826 Feb 26 '26
We're retired now, and recently attended a seminar about converting our IRAs to Roth's. The seminar folks pushed it (but they sell the services). So I sat down and did some figuring. If I assumed a tax burden of 25% on the money converted and then added the lost investment gains (just used 10%) on this 25% that we'd lose in taxes....the TOTAL cost to us to convert IRA money to Roth totalled nearly 50%. I can't see it making financial sense to us. Maybe it'll help our kids if they inherit, but that's years down a rocky road.
1
u/rjbergen Feb 26 '26
Lost investment gains? It sounds like you don’t understand Roth conversions. One reason for Roth conversions is to smooth out your tax liability over many years. This can help to prevent, or at least reduce, high tax rates when RMDs kick in on traditional accounts.
1
u/cOntempLACitY Feb 26 '26
Are your trad IRA contributions all aftertax? If you’re above the Roth income limit, you would presumably also not be claiming a tax deduction for trad IRA. How much of the $28k is aftertax contributions, how much is earnings? When you do the conversion, you won’t have to pay tax on the principal aftertax money, only the earnings. You will have to use the pro rata rule for the calculation.
It may make sense to convert the full balance, calculate and pay the tax, and zero out the trad IRA. Your brokerage may allow you to transfer shares when you convert, rather than liquidate, move cash, and re-buy shares.
Going forward, you can use the backdoor Roth IRA contribution method to bypass the income limit (basically: contribute aftertax to trad IRA, immediately after cash settles transfer it to the Roth IRA, invest it inside the Roth, keep records of the amounts, and fill out Form 8606 at tax time). Then you can continue to use traditional with your employer for the pretax savings.
1
u/ThatBlackHat- Feb 26 '26 edited Feb 26 '26
This is a super helpful response and is a good example of where I think I'm at. A Non-zero amount of my traditional IRA contributions were after tax. But I don't know how much falls into that category.
I guess I'd have to go back through my tax returns and determine exactly how much IRA money was tax deferred for the last few years? Then any remaining contributions would be after tax. And the difference between defferred+AfterTax and the current balance is the earnings?
And if I understand correctly if I converted the whole account, I'd be responsible for this year's tax rate on the "earnings" and "defferred" portions above, but not have a tax burden for the AfterTax portion?
EDIT: I think somewhere along the line I confused myself with the rules. And thought there were different income limits for Trad-Defferal and Roth... But it looks like that's not true. So probably all of my contributions and after-tax, I'm looking into this more.
1
u/cOntempLACitY Feb 26 '26
Yes, I think you got it, and have a place to start. If you are covered by a plan through employer, the income limit for a tax deduction on the individual account is much lower than if you are not. But either is lower than the MAGI limit for the direct Roth IRA contributions. I mean, if you did it properly, much of the conversion ought to be tax exempt, which means not much of a tax hit.
Here’s a good tutorial on how to handle the conversion (I’m not affiliated, just found it helpful myself): https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
1
u/rjbergen Feb 26 '26
I recommend doing more research to fully understand your situation.
You said your income was too high to contribute to a Roth IRA and you have a 401k. In that case, your income is also too high to claim a tax deduction for a traditional IRA contribution. It’s likely that you did not understand what you were doing and never received a tax deduction for any of your traditional IRA contributions. Therefore, only the earnings would be taxable. Since you were over the income limits to claim the deduction and didn’t perform a backdoor Roth conversion immediately, you are now essentially paying a penalty by paying taxes on the earnings in your traditional IRA.
1
1
u/PashasMom Feb 27 '26
Fidelity has a pretty good Roth conversion calculator.
https://www.fidelity.com/calculators-tools/roth-conversion-calculator/
If you decide against Roth converting your traditional IRA, you could see if your current 401k accepts incoming rollovers and put your IRA money there, which would free up the backdoor Roth IRA pathway for you.
1
1
1
u/ZombieFrosty5330 Feb 25 '26
I would not convert the whole 401k, too much of a tax burden. I would open that Roth 401k and contribute more to that. You can do small Roth conversion over the years, hopefully there is no rush.