Retirement Planning

Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA can provide a number of benefits. The conversion is taxable, but investments grow tax-free after that, and there are no taxes on qualified withdrawals. Traditional IRA holders may be able to convert these assets to a Roth Conversion IRA, in which future earnings and withdrawals can be tax-free.

Who Is Eligible to Convert to a Roth IRA?

Before 2010, only people with Modified Adjusted Growth Income (MAGI) of $100,000 or less in the year of the conversion could convert Traditional IRA assets to a Roth IRA. The limit applied to individuals and couples. Married couples filing separately weren't eligible.

Starting in 2010, the $100,000 MAGI limit and the filing status requirement have been eliminated—any Traditional IRA holder can convert to a Roth IRA.

Paying Taxes on Conversions

  • You must pay income tax on any deductible contributions or earnings.
  • It may be more advantageous to pay the taxes due on the conversion amount out-of-pocket rather than tapping your retirement account.

If you withdraw money from your Roth Conversion IRA prior to age 59½ and haven't held the Roth Conversion IRA for five years, a 10% IRS early distribution penalty applies (with some exceptions, including your disability).

Partial Conversion

If converting all of your Traditional IRA assets to a Roth IRA creates a significant tax liability, consider converting only a portion of those assets to make the taxes easier to handle.

You Might Want to Consider Converting If:
  • You expect to be in the same or higher tax bracket during retirement and won't be withdrawing your money for a while.
  • You can pay the conversion tax out-of-pocket instead of dipping into your retirement account.
  • You're almost 70½ and don't want to take mandatory distributions from your Traditional IRA.
  • Your Traditional IRA contributions were nondeductible.
  • For estate planning purposes, you'd like to pay taxes now to reduce your taxable estate.
You Might Not Want to Consider Converting If:
  • You expect your tax bracket after retirement to be lower.
  • You don't have extra money to pay the taxes and would have to use your IRA assets.
  • Conversion would push you into a higher tax bracket.
  • You may need your money before your Roth Conversion IRA has been open for five years.

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