How to Make a Roth IRA Conversion

Posted by Jill on March 15, 2010

This is the first article in a series on Roth IRA conversions this week.

As you probably know, there are no longer income limits for future retirees hoping to convert traditional IRAs to Roth IRAs.

Previously, only those with income under $100,000 could take advantage of the superior tax treatment of a Roth. Today, the Roth IRA conversion rules allow anyone to convert existing funds, even if you make too much to contribute new savings to a Roth IRA.

Why a Roth IRA is Good for You

A Roth IRA is the Cadillac of retirement plans. It is funded with after-tax dollars and allows you to:

  • Withdraw your contributions tax- and penalty-free.
  • Withdraw growth on your contributions tax-free after age 59.5.
  • Keep your contributions and earnings in the account as long as you want, with no requirement for minimum contributions.

Roth IRA Conversions

If you are the owner of a traditional IRA, you may want to convert all or part of the funds to a Roth. The Pension Protection Act of 2006 also allows you to convert assets from 401(k)s or similar employer plans directly to a Roth IRA. You will have to pay tax on any deductible contributions. However, once the conversion is done you will never pay taxes on any eligible withdrawals!

If you are under 59.5, Roth IRA contributions generally have to remain in the account for 5 years after conversion before they can be withdrawn. So you should not convert any amount you might need in the next 5 years.

How to Convert to a Roth IRA

Converting to a Roth IRA is simple. It requires a little paperwork with your IRA account manager and reporting to the IRS. Specifically, you should take the following steps if you are interested in a conversion:

  1. Decide if a conversion makes sense for you. Remember, you will pay taxes on all earnings in your traditional IRA as well as all non-deductible contributions.
  2. Decide where you want to hold your Roth IRA. If you are converting from a traditional IRA, you will probably keep your account at the same financial services company. If you are converting from an employer account, you may need to look into options like Scottrade or Vanguard.
  3. Contact the company where you will hold the Roth and request the applicable paperwork. If you are transferring assets from another financial services company you may need to open a traditional IRA first, then complete the conversion. A customer service rep will be able to walk you through the process and provide any necessary paperwork.
  4. Complete the paperwork, which should specify how to invest the converted assets and how you intend to pay taxes (withhold from the converted amount or separate payment). Conversions must be done by December 31 of the tax year.
  5. Report the conversion at tax time on your 1040 and Form 8606 and pay any applicable taxes.
  6. Reap the benefits of your new Roth IRA!

Check out Should You Do a Roth Conversion?

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Comments to How to Make a Roth IRA Conversion

  1. Regarding question 1. Decide if a conversion makes sense for you. It seems this question is the key. Any sources or methods to determine if it makes sense? Perhaps, current balance, current income, time until retirement? Once question 1 is answered, the rest seems just a matter of process of getting the account converted.


  2. It certainly appears tax rates will be going up in the future. That prospect makes IRA conversion even more appealing.

    Daddy Paul

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