Roth Conversion
The process of moving funds from a traditional pre-tax retirement account (IRA, 401(k)) to a Roth account, paying ordinary income tax on the converted amount in exchange for tax-free future growth and withdrawals.
Detailed Explanation
Roth conversions are most valuable when current tax rates are lower than expected future rates: gap years between jobs, early retirement before Social Security and RMDs, or years with large business losses. The converted amount is added to ordinary income and taxed at marginal rates, so partial conversions over multiple years can avoid pushing the taxpayer into higher brackets. Roth conversions cannot be undone (recharacterization was eliminated by the TCJA). Coordination with the pro-rata rule, IRMAA Medicare premium thresholds, and ACA premium tax credits is essential.
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Learn about Tax Planning & StrategyRelated Terms
Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
Required Minimum Distribution (RMD)
The annual minimum amount that must be withdrawn from most retirement accounts after a specified age, taxed as ordinary income.
Tax Bracket
A range of taxable income subject to a specific marginal tax rate under the federal progressive income tax system.
Adjusted Gross Income (AGI)
Adjusted Gross Income is your total gross income reduced by specific above-the-line deductions, used as the starting point for calculating your federal taxable income.
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