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How to Leverage Roth IRA Conversions for Tax-Free Growth

As a high-income earner with substantial assets, preserving as much wealth and net income as possible is likely a top priority—especially as you approach retirement. Creating tax-free investment growth and tax-free income can be a powerful strategy to help optimize your financial future.

One way to do this is by using various Roth IRA conversion strategies, which this blog will examine in more detail: 

  • Roth IRA conversions 
  • Backdoor Roth IRA conversions 
  • Super-Roth strategies 

These strategies can be especially valuable if you’re in a higher tax bracket and anticipate paying more taxes during early retirement. Each method offers unique financial advantages. You can also make these strategies part of your year-end tax planning strategy. 

Roth IRA conversions can be the foundation for providing powerful benefits, from tax free growth to tax-free distributions during retirement. However, income restrictions set by the IRS can limit direct contributions for you as a high-income earner. As Washington DC CFP® professionals, we specialize in helping successful individuals create and implement the tax benefits of Roth IRA strategies.

 

Read our latest Quick Guide: Washington DC Retirement and Wealth Transfer Strategies

 

Roth IRA Conversions: Shifting to Pre-Tax Contributions, Tax-Free Growth,  and Tax-Free Distributions 

A Roth IRA conversion allows you to shift funds from a traditional, tax-deferred IRA to a Roth IRA. This strategy involves paying taxes on the transfer amount in the year of the conversion. However, once funds are in the Roth account, they continue to grow tax free, and the big benefit is qualified withdrawals that are also tax-free.

Capitalizing on the Roth IRA’s unique tax advantages can be complex. However, if your income exceeds the threshold for direct Roth contributions, other strategies allow you to fund a Roth IRA while staying within IRS guidelines.

Case Study #1: Look at someone nearing retirement and how they leveraged a Roth IRA conversion. Jane is 60, with plans to retire at 65. She expects her tax bracket to increase in retirement due to several income sources she’ll be tapping into, including Required Minimum Distributions (RMDs) from various IRA and 401k retirement accounts, investment income, and Social Security benefits. Jane has a $250,000 Traditional IRA that she’s considering converting to a Roth IRA to avoid taxes on distributions during retirement years.

Here’s how that conversion would work from a tax standpoint:

  • Converting her $250,000 Traditional IRA to a Roth IRA would mean paying income tax on the converted amount. Since doing so all at once could push her into a higher bracket, she decided to break it into smaller, more manageable amounts. 
  • Jane could convert about $50,000 annually to spread the tax burden and keep her in a lower bracket yearly.
  • By moving to a Roth IRA, Jane continues to experience tax-free growth while avoiding RMDs, which helps her control her taxable income during her early retirement years.

 

 

Backdoor Roth IRA Conversions: A Strategy for High-Income Earners  

If your income exceeds Roth IRA contribution limits, a Backdoor Roth IRA conversion can better access more of the Roth IRA’s tax-advantaged benefits.  

This approach involves contributing after-tax dollars to a traditional IRA and converting those funds into a Roth IRA.  

When to use a Backdoor Roth IRA conversion: 

  • You’re a high-income earner and do not qualify for Roth contributions due to income limitations 
  • You want to take advantage of tax-free growth opportunities without the income restrictions on Roth contributions 
  • You have a clean slate with traditional IRAs, as the “pro-rata rule” affects how your conversion is taxed based on the balance in all traditional IRAs 

Case Study: John, 50, is a high-net-worth professional in Washington, DC. Earning above the Roth IRA income limit, he can still make a $6,500 contribution to a traditional IRA plus a $1,000 catch-up and immediately convert it to a Roth IRA.

Because his initial contribution was nondeductible, the conversion incurs little to no tax, allowing him to benefit from a Roth IRA despite his high income. 

Brown|Miller Pro Tip: Be mindful of the pro-rata rule, which bases conversion taxes on the total balance of all traditional IRAs. A Washington, DC CFP® professional can help you manage this process more efficiently.

 

Super-Roth IRA Conversions: Maximizing Tax-Free Income Potential 

A “Super-Roth” IRA conversion strategy, typically used for assets in a 401(k) plan, provides higher contribution limits and significant tax-free growth. This is often pursued through a “Mega Backdoor Roth IRA,” where you make after-tax contributions to a 401(k) plan and convert those funds to a Roth IRA or Roth 401(k).

Super-Roth IRA Conversions:

  • You have a 401(k) plan that allows after-tax contributions and in-service withdrawals
  • You want to significantly increase your tax-free retirement savings without the traditional Roth IRA limits
  • You want tax-free growth while maximizing all other retirement plan assets
  • The total 401(k) contribution limit for 2024 is $66,000, which includes employee, employer, and after-tax contributions

Case Study: Alex is a corporate executive whose employer offers a 401(k) plan that permits after-tax contributions and in-service withdrawals (or in-plan Roth conversions).

Alex has already contributed $22,500 for his salary deferral (pre-tax) and received $8500 as an employer match contribution. This totals $31,000 of the $66,000 limit. This means Alex can make an after-tax contribution of up to $35,000 to his 401(k), 

utilizing his maximum 401(k) contribution limit. His In-Plan Roth Conversion or In Service Withdrawal allows him to either:

  • Convert the $35,000 directly to his plan’s 401(k) portion (an in-plan Roth conversion) 

OR 

  • Roll over the $35,000 to a separate Roth IRA account through an in-service withdrawal 

Tax Consequences: 

  • Because this $35,000 was contributed after-tax, Alex won’t owe income tax on this amount during the conversion
  • If there were any growth in the after-tax contributions before the conversion (e.g., if the $35,000 earned $5000 before conversion), Alex would pay income tax on the $5000 gain 

Benefits: 

  • By using this Mega Backdoor Roth strategy, Alex can add a substantial amount into a Roth account, where future growth and withdrawals will be tax-free, provided he meets Roth requirements. This helps him maximize tax-free retirement savings beyond traditional Roth IRA or 401(k) limits.

 

Incorporating Roth Strategies into Year-End Tax Planning 

Each Roth strategy presents unique opportunities for year-end tax planning, and with proper timing, the tax impact of conversions can be optimized even more. Following are some key ways to incorporate these strategies into your planning: 

  • Assess Your Tax Bracket: Year-end tax planning is an ideal time to evaluate your current and future tax brackets. For instance, if you anticipate a lower income year or are retiring soon, executing a Roth IRA conversion might be a good time to lock in a lower tax rate. 
  • Plan for the Tax Impact: While Roth conversions provide long-term tax benefits, the upfront tax impact is critical to consider. Work with a tax advisor or a Washington DC CFP® professional to determine the right amount for a conversion. Spreading conversions over multiple years may avoid pushing yourself into a higher tax bracket.

 

Roth IRA Conversion Strategies with Brown|Miller Wealth Management  

Brown|Miller Wealth Management specializes in helping high-income earners and those with substantial assets maximize Roth IRA conversion strategies. Each strategy—whether a Roth IRA conversion, Backdoor Roth, or Super-Roth—requires careful tax planning, precise timing, and knowledge of IRS rules to realize all tax benefits.

Are you ready to discuss whether a Roth IRA conversion is the right strategy for you? Let’s have an introductory conversation today.

 

 

Disclaimer: This article is intended for informational purposes only, and not to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general  informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.
The information provided in this article represents the opinions of Brown Miller Wealth  Management (“BMWM”) and is expressed as of the date hereof and is subject to change. BMWM assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by BMWM at any time without notice. The information may be based on third-party information, which is deemed reliable, but its accuracy and completeness cannot be guaranteed.
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Author: Christopher W. Brown, CFP®, CIMA®

Christopher W. Brown is the Founder and Managing Principal at Brown | Miller Wealth Management.

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