It is commonly understood advice received by many American workers saving for retirement that they should, as they begin formulating a plan, consider contributing to an employer-sponsored 401(k) and an Individual Retirement Account (IRA).
Former NBC Today Show financial editor and HerMoney founder Jean Chatzky frequently answers questions about challenges people face when saving and investing for retirement.
Recently, she was asked about one tactic regarding an intriguing strategy for handling IRAs. She provided some financial details many people preparing for retirement will, no doubt, have an interest in exploring.
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Because pensions are no longer a significant part of an employer’s financial responsibility to its workers, 401(k)s have become a primary vehicle through which people fund their retirement savings.
Workers often receive matching contributions from the companies they work for as they put a percentage of their income into these accounts that grow in value over time.
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Regarding investing in IRAs, it’s important to consider the benefits and differences between two different types. Traditional IRAs involve contributions that are made free of tax, but are subject to taxes when one withdraws funds from them in retirement. Roth IRA contributions are taxed upfront, but withdrawals after one retires are made tax-free.
But is it possible, for tax reasons, to convert existing Traditional IRAs into Roth IRAs? That is the question Chatzky was asked — and her careful answer is well worth considering.
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Jean Chatzky has a warning about converting assets from traditional IRAs to Roth IRAs
According to the Internal Revenue Service (IRS), the annual limit a person can contribute to an IRA in 2025 is $7,000. People 50 years of age and older can add another $1,000 as a catch-up contribution, bringing their limit to $8,000.
For Traditional IRAs, there is no limit on the amount of income a person can make annually to contribute. For Roth IRAs, full contributions for single taxpayers are only allowed for incomes less than $150,000. If married filing jointly, full contributions are allowed for incomes less than $236,000.
Many people at higher income levels want to put themselves in the financial position of being able to pay as few taxes during retirement as possible. If they believe tax rates will be lower at that time, they often wonder if they can convert their traditional IRA to a Roth IRA.
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Chatzky explains that this is a question she gets frequently, explaining that the tactic is also called a “backdoor Roth IRA.”
But Chatzky warns people that converting assets from a traditional IRA into a Roth IRA involves paying taxes on the amount a person moves at the time they move it.
“What you don’t want to do is pull money out of a tax-advantaged haven and use that money to pay taxes,” Chatzky wrote. “That could, depending on your tax bracket, cost you well over 30% of every dollar. That’s not the way to go about it.”
Chatzky explains that a backdoor Roth IRA only makes sense for people who have plenty of money outside of their IRA to pay the taxes.
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Jean Chatzky explains how tax rates affect Traditional IRA to Roth IRA conversions
Chatzky urges people pondering this strategy to consider whether they believe their future tax rate will increase or decrease, with the goal of paying as little in taxes as possible.
“When we go with a Roth, instead of a traditional, it’s generally because we think our tax rate is lower now and is going to go up in the future,” she wrote. “If you are of the belief that taxes are overall going to go up in the future — and I’ve got to say, personally, I’m of that belief — then having at least some assets in a Roth is beneficial.”
Chatzky makes one further point: With a Roth IRA, people are never required to pull money out, so they can pass it along to future family generations without the money being taxed.
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