Roth or traditional, and what a Roth conversion costs

A traditional contribution may cut this year's tax bill and is then taxed when the money comes back out; a Roth contribution does neither. Which of the two is open to you is settled by your income and by whether a workplace retirement plan covers you.

The trade, and the limits that apply to both

Paying into a Roth earns you no deduction. What you get in exchange is that withdrawals meeting the rules come out untaxed, and that nothing obliges you to run the account down during your own lifetime. A traditional IRA works the other way round: possibly a deduction in the year you contribute, then ordinary tax on every dollar you eventually take.

For 2025 the ceiling is $7,000, with a further $1,000 allowed once you are fifty or older, and you need earned income before any of it is possible. One point gets missed constantly: that ceiling is a single allowance shared by every IRA you hold, traditional and Roth together, so opening a second account buys no extra room.

Whether you can deduct a traditional contribution

Everything in this section turns on one condition. Where a retirement plan at work covers you, the deduction tapers across a band of modified adjusted gross income and is gone once you are past the top of it. Where neither you nor a spouse is covered by a plan at work, no income limit touches the deduction at all, however much you earn.

Two further situations sit outside that scale. Someone with no plan at work whose spouse has one gets a separate band that opens far higher up. Someone married and filing separately gets a band that opens at almost nothing. Publication 590-A carries both, and neither can be summarized into a number here without misleading somebody.

Whether you can contribute to a Roth at all

The Roth rule has the same shape, aimed at the contribution rather than at a deduction. Past a band of modified adjusted gross income the amount you may pay in shrinks, and above the top of the band you may pay in nothing. The band is higher on a joint return.

Two cases are not on that scale. Someone married filing separately who lived with their spouse at any point during the year is phased out from nearly the first dollar. Someone married filing separately who lived apart from their spouse for the whole year uses the single band instead. This income wall is the whole reason the backdoor described below exists.

The two five-year clocks

There are two, they run on different triggers, and confusing them is the usual mistake.

The first decides whether a withdrawal is qualified, which is what makes it free of tax. It runs five years from the start of the first tax year a contribution was made for, which is the year it counts toward rather than the year it was paid, into a Roth held for your benefit, and the withdrawal also has to meet one of a short list of conditions: you have reached fifty-nine and a half, you are disabled, it passes to your beneficiary or to your estate on your death, or it goes toward a first home within a lifetime cap. Publication 590-B sets out the order in which amounts are treated as coming out of a Roth.

The second clock has nothing to do with the first and belongs to conversions. Take money out of a Roth inside the five years that open on the first day of the tax year you converted in, and the 10% additional tax on early distributions can fall on whatever part of that conversion you had to report as income. Each conversion opens its own window. In plain terms: money converted at fifty-five is not freely available at fifty-seven. That additional tax does not reach someone past fifty-nine and a half, so for that reader the five-year point decides whether earnings come out free of tax rather than whether a penalty lands.

The backdoor, and the rule that breaks it

Income limits contributions, not conversions. So someone shut out of a Roth can pay into a traditional IRA and convert the balance, which is where the nickname comes from.

The catch is that the tax on the conversion is not worked out on the dollars you believe you moved. Your basis, meaning the nondeductible contributions and the after-tax amounts rolled in, is counted across all your traditional IRAs together, as one pool. Only the share of a distribution that stands for that basis escapes tax, and every distribution keeps splitting the same way until the basis has run out.

Form 8606 is where that split is calculated, and it asks for the year-end value of all your traditional IRAs, which is what gives the rule its reach. A large pre-tax rollover sitting in a traditional IRA therefore makes most of a conversion taxable however the transfer was arranged. File Form 8606 for any year you make a nondeductible contribution, whether or not anything is converted. Money moved out of an employer plan follows different mechanics and is not covered here.

What a conversion costs, this year and next

A conversion is a taxable event in the year you carry it out. Amounts that would have been taxable had you simply drawn them from the traditional IRA go into gross income for that year instead.

The bill is not the only consequence. An unusually high income year can shrink a premium tax credit, and because Medicare premiums are set from a return two years old, it can lift those premiums later. The marketplace credit for 2026 and Medicare premiums and the income surcharge cover each of those.

A conversion made in 2018 or later cannot be reversed, so the decision is final on the day you make it. That argues for sizing a conversion against a target you have chosen in advance, rather than converting an account because the account is the thing you were looking at.