NEWSLETTER
Xerxes Nabong, CFP®, CDFA®
Philip M. Maliniak, CRPC®
Nicole Brown-Griffin, CFP®, CDFA®, EA
Aaron Petty, Client Associate
Hampton Roads: (757) 394-3486
Greater Phoenix: (480) 687-9339
Orange County: (949) 660-8869
Tax-Efficient Retirement: Traditional vs. Roth IRAs
One of the most common questions we get from clients is: “Should I contribute to a Traditional IRA or a Roth IRA?” The answer depends on your income, tax bracket, and long-term goals.
Let’s break down the key differences and dive into some advanced strategies like the Backdoor Roth and Mega Backdoor Roth IRA. We’ll also touch on what options exist if you’re self-employed.
Traditional IRA vs. Roth IRA – What’s the Difference?
| Feature | Traditional IRA | Roth IRA |
| Contributions | Possibly taxdeductible (based on income and workplace plan) | Made with after-tax dollars |
| Taxation on Growth | Tax-deferred | Tax-free |
| Withdrawals in Retirement | Taxable as income | Tax-free if qualified (age 59½ + held for 5 years) |
| Required Minimum Distributions (RMDs) | Begin at age 73 (75 if born 1960 or after) | None during lifetime |
| Income Limits to Contribute | No limits to contribute, but limits on deductibility | Income limits apply to direct contributions |
Tax Planning Considerations: Why Roth May Be More Attractive Now
The Tax Cuts and Jobs Act (TCJA) of 2017 reduced federal income tax rates across the board and was initially set to expire at the end of this year. However, with the passage of the One Big Beautiful Bill Act, these rates are now considered “permanent,” meaning they will remain in place until future legislation changes them. This makes paying taxes now through Roth contributions a smart long-term move, especially if you expect to be in a higher tax bracket later.
Roth IRAs also offer significant tax advantages for those seeking tax-free income in retirement or those concerned about rising tax rates in the future.
Backdoor Roth IRA Strategy
If your income is too high to contribute directly to a Roth IRA (in 2025, that begins phasing out at $150,000 for single filers and $236,000 for married filing jointly), you can still contribute through the Backdoor Roth strategy. Here’s how it works:
- Contribute to a non-deductible Traditional IRA (no income limits to do so.)
- Convert it to a Roth IRA.
This can be a tax-efficient move if you don’t have other pre-tax IRA assets, because of the IRS prorata rule. When you convert to a Roth, the IRS treats all of your Traditional IRAs as one combined account. So, if you have both pre-tax and after-tax dollars, your conversion will be taxed proportionally.
For example, if 90% of your IRA assets are pre-tax and 10% are after-tax, then 90% of any amount you convert will be taxable. That’s why this strategy works best if you have no other pre-tax IRA balances.
Mega Backdoor Roth IRA (for High Earners with 401(k) Access)
If you have access to a 401(k) plan that allows after-tax contributions (not to be confused with Roth 401(k) contributions), and also permits either in-plan Roth conversions or in-service withdrawals, you can take advantage of a strategy known as the Mega Backdoor Roth IRA.
How It Works
- Max out your regular 401(k) contributions first. For 2025, the limit is $23,500, with an additional $7,500 if you’re age 50 or older, for a total of $31,000.
- Then, you can contribute after-tax dollars into your 401(k), up to the overall IRS limit of $70,000 in 2025 (or $77,500 if age 50+ with the catch-up). This total includes your contributions PLUS any employer contributions. So, to figure out how much after-tax you can add, you must subtract both your own deferrals and your employer’s match or profit-sharing from the $70,000 limit.
- Once those after-tax contributions are made, you can either:
- Convert the after-tax portion to the Roth portion of your 401(k)
- Roll the after-tax dollars into a Roth IRA through an in-service withdrawal, if your plan allows.
- The result: you’ve moved additional dollars into a Roth environment, where future growth and withdrawals are tax-free, without being limited by Roth IRA income or annual contribution caps.
This strategy is extremely beneficial for high earners who are already maxing out their standard 401(k) contributions and are looking for additional ways to build tax-free retirement assets. It’s especially powerful for business owners or executives with flexible retirement plan structures or custom 401(k) plan designs.
Self-Employed? You Have Even More Options
If you’re self-employed, you can go beyond the Traditional and Roth IRA contribution limits:
- SEP IRA: Contribute up to 25% of net selfemployment income, up to $70,000.
- SIMPLE IRA: Allows employee contributions up to $16,500 plus employer match ($20,000 with catch-up contributions).
- Solo 401(k): Combines employee deferrals and employer contributions, up to $70,000 total for 2025 if you’re under 50 ($77,500 with catch-up contributions). It also allows Roth contributions and Backdoor Roth conversions, depending on plan design.
** Next, we will go over some additional questions people have regarding IRAs. **
Can I contribute to a Traditional IRA if I have access to an employer plan?
Yes, you can contribute to a Traditional IRA even if you’re covered by a workplace retirement plan like a 401(k). However, whether your contribution is tax-deductible depends on your income level and tax filing status.
- If you’re single and covered by a workplace plan, your deduction begins to phase out at around $79,000 of modified adjusted gross income (MAGI) and phases out completely at $89,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace plan, the deduction phases out between $126,000 and $146,000.
- If you’re not covered by a plan, but your spouse is, the phase-out range is between $236,000 and $246,000.
Even if your contribution isn’t deductible, you can still fund a Traditional IRA and potentially convert it to a Roth IRA using the Backdoor Roth strategy. Keep in mind that these income limits do not affect your ability to contribute to a Traditional IRA, only whether you can deduct the contribution on your taxes. This makes Traditional IRAs a flexible planning tool, especially when combined with Roth strategies.
Can I do Roth conversions with my RMD?
No, required minimum distributions (RMDs) cannot be converted to a Roth IRA. Once you reach the age where RMDs are required, currently age 73, you must first take your full RMD for the year before you are allowed to convert any additional traditional IRA or pre-tax retirement funds to a Roth IRA.
If you try to convert part of your RMD, the IRS will treat it as a distribution, and it will still be taxable, but it won’t count as a Roth conversion. This can but it won’t count as a Roth conversion. This can result in tax issues or penalties if done incorrectly.
That said, you can still do Roth conversions in addition to your RMD, as long as the RMD is taken first. For example, after satisfying your RMD for the year, you can choose to convert any remaining IRA balance to a Roth IRA, which may make sense if you’re trying to reduce the size of future RMDs or leave behind tax-free assets to heirs.
For those approaching RMD age but not quite there yet, it can be especially valuable to consider Roth conversions in the years between retirement and the first RMD, when your income and tax bracket might be lower. This can be a strategic window to move funds into a tax-free account at a reduced tax cost.
Choosing the Right Mix
The right approach depends on your current tax situation, income, and long-term financial goals. In many cases, a blend of Traditional and Roth accounts provides flexibility in retirement. We can also help assess whether strategies like Backdoor or Mega Backdoor Roth contributions make sense for your unique financial picture.
Some ideas to keep in mind:
- When considering pre-tax retirement contributions, your best bet is often to maximize your employer-sponsored retirement plan with up to $23,500 (or $31,000 if you’re age 50 or older). This not only takes advantage of potential employer matching contributions but also avoids the income limits and lower contribution caps associated with Traditional IRAs, which are limited to $7,000 (or $8,000 if over 50).
- For self-employed individuals, establishing a retirement plan can be especially advantageous. Options like a SIMPLE IRA, SEP IRA, or Solo 401(k) offer significantly higher contribution limits compared to Traditional or Roth IRAs, providing much greater potential for tax-deferred savings, or even Roth contributions, if structured within a Solo 401(k).
- If your income is lower now and you expect to be in a higher tax bracket in retirement (meaning you’ll need or want more monthly income than you receive today), having Roth dollars makes sense. On the other hand, if you’re in a high marginal tax bracket now and expect to be in a lower bracket later, funding retirement with pre-tax dollars to gain immediate tax savings, then spending that money later at a lower tax rate, is usually a good idea.
- As for Roth conversions now, it depends on your future tax rates and whether you plan to live in a different state in retirement. For example, doing a Roth conversion in a state with high income tax rates only to move to a state with low or no income tax later may not be financially beneficial.
But what’s right for you? We can discuss your situation and strategize a mix suitable for you now and in the future.
Your Team at Wealth Avenue,
P.S. At Wealth Avenue, we work with individuals and families who are intentional about building and preserving their wealth, and who value expert guidance, especially when it comes to navigating the tax impact of decisions like Traditional versus Roth IRA contributions, conversions, and broader retirement strategies.
If you know someone who is going through a financial transition, thinking about retirement, or simply unsure how to decide on which strategies will optimize their tax planning, we’d be honored to connect. Whether it’s a friend, family member, or colleague, we’re happy to share this information and have a conversation to explore how we can help.
With offices in Virginia, Arizona, and California, and the flexibility of virtual meetings, we’re available to support clients wherever they are.
We’re deeply grateful for the trust you’ve placed in us by introducing your family, friends, and colleagues. Thanks to your support, our practice has grown thoughtfully and intentionally, focused on building meaningful relationships and helping those we serve reach their financial goals. So far this year, you’ve shared 40 introductions with us, and we’ve been honored to welcome 33 of those individuals and families as clients, working together to create personalized strategies that truly make a difference. Your trust means everything to us, and we’re committed to continuing to provide the same level of care and guidance to those you send our way.
And finally, for parents and grandparents thinking about legacy planning, consider this Forbes article on Roth IRAs for kids. Especially when started early, a Roth IRA can be a smart, long-term strategy. If your child or grandchild has earned income, contributing to a Roth takes advantage of their low or zero tax bracket and gives their investments decades to grow tax-free. Roth IRAs are a strong starting point for young savers who may not benefit from immediate tax deductions but can gain substantial long-term value through compounding and tax-free withdrawals.
