Roth Conversions Vs. Roth Contributions — What Is the Difference?

A Roth Individual Retirement Arrangement (Roth IRA) account is an investment account to which you contribute after-tax dollars (or convert pre-tax dollars) that grow tax-free and, after meeting certain requirements, can be withdrawn tax-free. If you are curious whether a Roth conversion is the same as a Roth contribution, you are not alone. The terms “Roth contribution” and “Roth conversion” are often confused and used interchangeably. However, these two financial planning strategies are different and offer unique advantages for investors.

Learn about the key differences between Roth contributions and Roth conversions below.

How Does a Roth Contribution Work?

If you have earned income and are under age 50, you can contribute up to $6,500 after-tax dollars to a Roth IRA annually. If you have earned income and are age 50 or older, you can contribute up to $7,500 to your Roth IRA annually. You can then withdraw these earnings tax-free from your IRA after turning 59 1/2 — as long as the IRA has been open for five years or more. Your Modified Adjusted Gross Income (MAGI) also impacts how much you can contribute to your Roth IRA. If you do not have earned income, then you are not eligible for Roth contributions.

How Does a Roth Conversion Work?

A Roth conversion is an investment rollover that occurs when you transfer pre-tax dollars into an after-tax Roth IRA. 

One of the advantages of a Roth conversion is that there are no earning limits. For example, you could convert and then invest $30,000 into your Roth IRA from another IRA or qualified pretax source and pay taxes during the fiscal year in which the conversion occurs. Each Roth conversion starts a 5-year clock on those funds being accessible tax-free.

A second advantage of this option is that Roth IRAs have no age-based required distributions, as opposed to Traditional IRAs that do have required minimum distributions.

The Differences Between Roth Contributions and Roth Conversions

Is a Roth conversion the same as a contribution? In short, no. These two financial planning strategies offer investors different benefits. 

With a Roth contribution, you invest money into your Roth IRA from an after-tax source, like your checking or savings account. You have already paid taxes on the amount you contribute to your Roth IRA. This money then grows tax-free and penalty-free in your Roth IRA.

However, with a Roth conversion, you invest money from a pretax source into your Roth IRA. A pretax source could be another IRA or a 401(k). With a Roth conversion, you pay taxes today.

Contact HSC Wealth Advisors Today to Learn More

Roth contributions and Roth conversions are both beneficial, depending on your circumstances. We recommend you speak with your Certified Public Accountant (CPA) or an accredited Financial Advisor before committing to a specific strategy. Your Financial Advisor helps you understand the bigger picture and select a suitable retirement planning strategy for your unique financial situation. 

At HSC Wealth Advisors, we are affiliated with the National Association of Personal Financial Advisors (NAPFA) and Registered Investment Advisors (RIA). As a fee-only firm, we do not receive commissions or compensation from outside sources, meaning your financial health is our only priority. For over 30 years, our CERTIFIED FINANCIAL PLANNERS™ have helped clients develop effective saving strategies, minimize tax liability, and make informed financial decisions.

Contact us today to learn more about our wealth management services or to speak with a team member about how we can help you meet your long-term financial goals.