A robust retirement plan features multiple saving tactics that seamlessly work together to help you reach your goals.
Beyond contributing to an employer-sponsored 401(k) plan, a Roth IRA is a popular option thanks to its tax-free growth and, provided certain criteria are met, tax-free distributions. And, unlike traditional IRAs, Roth IRAs don’t require you to take distributions in retirement, so can be part of your estate planning strategy as well.
Here are three ways you can fund a Roth IRA to help achieve your goals:
Provided you have earned income for the year, the most straightforward way to fund a Roth IRA account is to make a contribution for the year. In 2025, generally, you can deposit up to $7,000 to all your IRA accounts combined, including any traditional and Roth accounts you have. If you’re 50 or older, you can contribute an additional $1,000.
Each year, be sure that you are under the income limits for contribution eligibility. In 2025, if you file as single/head of household with a MAGI of$150,000 or less, you can contribute the full amount. If MAGI is more than $150,000 and less than $165,000, contributions are limited, while those with MAGI of $165,000 or more cannot contribute to a Roth IRA. For married couples filing jointly, the pertinent amounts are $236,000 and $246,000 for a partial contribution.
A popular way to fund a Roth IRA is to convert a traditional IRA account into a Roth IRA account. No matter how much you earn or your income tax filing status, you can convert an account from traditional to Roth. However, you typically cannot convert an inherited IRA to a Roth, except in limited cases such as when inheriting that IRA from a spouse.
If your income exceeds the limits that allow you to participate in a Roth IRA, there’s something called a “back door” Roth IRA that allows you to participate through a conversion. To go through the back door, you make a nondeductible contribution to a traditional IRA and then convert those assets to a Roth. For this strategy to be successful, you must not have any IRAs with pre-tax dollars in them. This means that if you have any pre-tax dollars in any traditional IRA, the conversion will be partially taxable. This requirement can get complicated, but it boils down to two IRS rules: the aggregation rule and the pro rata rule. Since the contribution was made with after tax dollars, there is not tax liability when you convert the funds. This is a workaround that will give you the benefit of qualified tax-free withdrawals in the future. There are no limits on the number of Roth conversions you can make.
SEP IRAs and SIMPLE IRAs can also be converted to Roth IRAs, but to do so, you’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after the conversion. And you must have participated in the SIMPLE IRA plan for at least two years before converting the funds.
When you convert a traditional IRA to a Roth IRA, the converted dollars are subject to tax at ordinary rates.
If you’ve only made nondeductible or after-tax contributions to your traditional IRA, then only earnings (not your contributions) will be subject to tax at the time of conversion. But if you’ve made both deductible and nondeductible contributions and you don’t plan on converting the entire amount, things may get… complicated.
IRS rules require the amount you convert to consist of a pro-rata portion of the taxable and nontaxable dollars in the IRA. For example, if your traditional IRA contains $350,000 of taxable (deductible) contributions, $50,000 of nontaxable (nondeductible) contributions, and $100,000 of taxable earnings, you can’t convert only the $50,000 nondeductible (nontaxable) contributions to a Roth and make that conversion tax-free. You need to pro-rate the taxable and nontaxable portions of the account. Because the taxable portion of the entire account is 90% ($450,000 of taxable assets and $50,000 of nontaxable assets), 90% of each distribution from the IRA will be taxable (the other 10% will be nontaxable).
There’s no way around this rule, even if you hold multiple IRAs. The IRS requires you to aggregate all your traditional IRAs (including SEPs and SIMPLEs) when you calculate the taxable income resulting from a distribution or conversion. Employer plans such as 401(k)s, 403(b)s and 457(b) plans may be excluded from aggregation and the pro-rata rules.
If you’re ready to convert your traditional IRA to a Roth, start by notifying your existing traditional IRA trustee or custodian that you want to convert assets to a Roth. You don’t have to keep your Roth IRA with the same financial institutional as your traditional IRA; you can directly transfer funds regardless. If you’re transferring from one institution to another, both will have forms you must fill out to complete the transfer. Or you can have the funds in your traditional IRA distributed to you, then roll them into a new Roth IRA account within 60 days. The tax consequences are the same, whichever method you choose.
Another way to fund your Roth IRA is by converting assets from an employer-sponsored plan, like a 401(k). If your employer plan is already a Roth account, you can directly transfer those assets into a Roth IRA. You can convert non-Roth funds into a Roth IRA, but they will be treated like a traditional IRA conversion. The amount you convert will be subject to income tax in the year of your conversion, with the exception of any after-tax contributions you’ve made to the account.
If you’re leaving your employer, keep in mind that there may be other distribution options available to you. Generally, you can leave the assets in your former employer’s plan, transfer assets to a new employer’s plan, or take the distribution in cash. But remember, a cash distribution will result in a tax obligation on the taxable portion and may also be subject to a 10% penalty tax if you’re younger than 59.5.
Regardless of how you decide to fund it, a Roth IRA is a useful investment vehicle that can help provide financial confidence. With careful planning and disciplined saving, you’ll give your nest egg the opportunity to grow – and enjoy tax-free distributions when you’re ready to take them.
This material has been created by Raymond James for use by its financial advisors.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax- free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
IRA tax deductibility and contribution eligibility may be restricted if your income exceeds certain limits, please consult with a financial professional for more information.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
