Converting to a Roth IRA

Maximize Your Retirement Savings

Converting your Traditional or SIMPLE (Savings incentive match plan for employees of small employers) IRA to a Roth IRA may be a great way to maximize your retirement savings. The conversion process is fairly easy—the big question is, is conversion right for you?

Factors to Consider:

  • The balance of your Traditional IRA
  • Your current IRA investments
  • Number of years until retirement
  • Your current tax rate vs. anticipated future tax rate
  • Your ability to pay tax now

Why Convert?
Roth IRAs offer some specific advantages. For example, Roth IRAs don’t ever require you to take distributions, no matter what your age. This makes them ideal if you wish your IRA to be a tax-free bequest after your death.

If you do take distributions in your lifetime, they will likely be tax-free. Because you pay tax in the year you convert your assets, you do not have to pay tax again when you receive distributions, no matter when that is. Even better, once you’ve owned a Roth IRA for at least five years, you not only can withdraw the conversion amounts tax and penalty free, but the earnings too.*

Your income must be under certain limits to be eligible to make annual Roth IRA contributions. So if you are not eligible to contribute, converting may be your only way into a Roth IRA.

Make an IRA Strategy
Keep in mind that certain distributions you receive from your Traditional or SIMPLE IRA cannot be converted:

  • Required minimum distributions (RMDs)
  • Substantially equal periodic payments
  • Excess contributions

If your goal is to move money into a Roth IRA but you have concerns about paying the tax, it may be helpful to know that you do not have to convert your entire IRA balance in one year. You can move some of your IRA savings each year, or wait until you are in a lower tax bracket to convert.

Two Types of Conversion: Direct and Indirect
You can convert to a Roth IRA directly or indirectly. A direct conversion occurs when the distribution from your existing Traditional or SIMPLE IRA is payable to the receiving financial organization for the benefit of your Roth IRA. An indirect conversion occurs when the distribution is payable to you, and within 60 days you deposit the money into a Roth IRA.

How Conversion Works
1. The money leaves your Traditional or SIMPLE IRA. (You may withhold on that money, but be aware that withholdings are subject to income and penalty tax.)

2. The money is deposited into your Roth IRA as a conversion contribution.

3. The financial organization(s) administering the conversion reports the movement of assets to the IRS, while you include any pretax amounts converted in your taxable income for the year of the conversion.

4. Enjoy tax-fee income during retirement (or before).

*To avoid a penalty, you must be age 59½ or older, disabled, buying a first home, or a Roth IRA beneficiary.