Converting a Traditional IRA to a Roth IRA
It is possible and sometimes desirable to convert a traditional IRA to a Roth IRA. With a Roth IRA, you pay no taxes on distributions that fall within the guidelines.
The process is not simple, but our Retirement Specialists can walk you through the steps. Because there are major tax implications involved, you should check with a tax professional before taking any action.
There are some restrictions on conversions:
Your modified adjusted gross income cannot exceed $100,000, whether single, or married and filing jointly.
If you are married and filing separately, you are generally not eligible for a conversion regardless of income.
- If you convert and at the end of the year determine your income exceeds the $100,000 limit, you can reverse the conversion if completed by the due date of your tax return.
When you convert a traditional IRA to a Roth IRA, you must pay income tax on your deductible contributions and any earnings. However, since this is not a distribution, you do not have to pay a penalty if you follow the guidelines.
You can convert only a portion of your IRA assets, however you may not convert only your nondeductible contributions.
There are many good reasons to convert some or all of your traditional IRA assets to a Roth IRA, but it is not for everyone. Here are some things to consider:
Conversion may make sense if you are a long way from retirement. You can't predict the tax rates or circumstances in the future, so it may make sense to prepare for the worst (higher tax rates) during your retirement.
You may also consider a conversion if your IRA assets haven't grown significantly and the tax on their growth would be minimal.
If you are certain you will be in the same or higher tax bracket after retirement, it might be easier to pay the taxes while you are still working.
You may not want to convert traditional IRAs that have significant deductible contributions and earnings.
If you believe you will be in a lower tax bracket during retirement, you will probably want to consider paying taxes then, rather than paying higher taxes now that would be due on conversion.
For more help in understanding the effect of a conversion, visit the Roth IRA Conversion Analyzer.