Traditional IRA contributions allow you to realize a deduction to your Adjusted Gross Income now and avoid capital gains tax through the future until you withdraw funds at which point it’s taxed as AGI.
A Roth IRA enables you to contribute post-tax money into an investment account and avoid capital gains tax through the future forevermore as long as you meet the holding and distribution requirements.
Converting a Traditional IRA into a Roth IRA allows you to realize income taxes on your account balance now so you may continue to defer capital gains and not have to pay taxes in the future to maximize your long-term net worth.
Higher income earners aren’t eligible to realize an AGI deduction from Traditional IRA contributions but those contributions would not be subject to income taxes upon withdraw, which makes those contributions prime to convert into a Roth IRA account.
Converting a Traditional IRA into a Roth IRA into a Traditional IRA, or vice versa, is considered a recharacterization of your IRA contributions.
Prior to tax reform, the Tax Cuts and Jobs Act of 2017, the IRS allowed taxpayers to execute a conversion and then revert their investments back to the prior account type.
The ability to reverse the conversion was a big benefit because if after the fact you realized your income would be higher than expected, you could back out the transaction to mitigate taxes.
Further, you could also reverse the transaction if your Roth IRA account value decreased after the conversion, thus avoiding having to pay higher income taxes on a lower account value.
The IRS still allows you to convert investments held in one account type into another, you just can’t reverse the transaction now.
This means the due diligence of your tax accountant and financial adviser must be much more thorough and on point going forward when helping you fill up tax brackets with Roth conversions.