When you’ve been in business as long as we have and you’ve helped as many retirees and soon-to-be-retirees with their planning as we have, you hear a lot of the same questions. We thought it would be a good idea to answer a couple of these repeated questions every week.
Please note this very important fact. Our answers do not take into account your particular investment objectives, financial situation, or risk tolerance and may not be suitable for all investors. Our answers are not financial advice and should not be taken as advice. This material is provided for educational purposes only.
I Want To Put Money Into A Roth Account. Am I Making A Contribution Or A Conversion?
The advantages of Roth accounts are straightforward: you don’t pay tax on withdrawals, the money you withdraw doesn’t count as income for any sort of retirement income calculations, and the account isn’t subject to RMDs. Those advantages are subject to a few big “ifs”. Roths can only be funded if you have earned income equal to or greater than the amount you’re funding (but not too much income) and the money has to be in the account for five years before the growth can be withdrawn tax-free.
Physically getting money into a Roth account can be complex and it can cause a lot of trepidation. While this isn’t financial advice and you shouldn’t do anything with your money without consulting a qualified professional, we’ll try to walk you through the basics of doing this.
WHAT Is the difference between a Roth Contribution AND A ROTH CONVERSION?
Money going into a Roth has to be taxed. While funding qualified accounts, like a traditional 401(k) with your employer, can come from pre-taxed funds from your paycheck, Roths have to be funded with money you’ve already paid taxes on. If traditional accounts are funded from your pre-tax gross, Roths are funded from your post-tax net.
A Roth contribution is using those already taxed moneys to open a new Roth account or fund an existing Roth account. In 2026, you can contribute $7,500 to a Roth IRA ($8,600 if you’re over 50). If your employer offers a Roth retirement account (e.g. 401(k), 403(b), 457, etc.), you can contribute up to $24,500 in 2026 (or $32,500 if you’re over 50, or $35,750 if you’re between 60 and 63). IRAs you’ll contribute to manually. Employer-sponsored accounts can have contributions come out of your net pay automatically by your employer. Even better, if your employer offers a match, you can have that match go into the Roth component
A Roth conversion is rolling over funds from an existing tax-deferred account like an existing traditional IRA or 401(k) into a new or existing Roth account. By doing this, the converted funds receive all the advantages of Roth funds going forward. And a conversion carries the additional advantage of typically not having the income or contribution limits of regular contributions like we just described. However, there are some drawbacks.
First, remember that Roths have to be funded with taxed money and the money in your traditional tax-deferred IRA or employer-sponsored account has never been taxed. So any money rolled out of a traditional account and into a Roth will be taxable for the year the conversion happens. A big conversion will mean a big tax bill.
Secondly, you can only do one Roth conversion each year. Getting the math right is important.
Thirdly, each conversion is subject to its own five-year runoff before the fund growth becomes tax-free.
Finally, a Roth conversion… like any rollover… can only be done once you have access to the traditional account’s funds. More often than not, this means you must be at least 59 1/2 years old to make a “qualified distribution” from that traditional account.
Roth conversions should be planned carefully, not done casually. The best strategy depends on your tax picture today and your expected tax picture tomorrow. There is nothing preventing you from doing this all yourself but once again be aware of the severe penalties and tax consequences that can strike if you make a mistake.
If you need help getting any of this done… that’s what Franklin Retirement Solutions is here for. Give us a call at 215-657-9200, send an email to [email protected], or grab some time with one of our advisors to get started.