You can shift money from a tax-deferred retirement account into an after-tax account—but how much tax do you pay on that Roth IRA conversion? And does it always make financial sense to do so?
The biggest difference between Roth IRAs and tax-deferred retirement accounts like traditional IRAs and 401(k)s is when you pay the tax:
- Traditional IRA and 401(k) contributions are tax-deductible the year you make them, and you pay income tax on withdrawals in retirement.
- Roth IRA contributions don’t offer an upfront tax break, but withdrawals in retirement are tax-free.
