Converting Traditional IRA Savings to a Roth IRA

A Roth individual retirement account ( IRA ) conversion lets you shift money from a traditional IRA into a Roth IRA. Doing so lets you take advantage of a Roth IRA ’ s many benefits, including tax-exempt withdrawals in retirement and no ask minimal distributions ( RMDs ) during your life .

however, Roth IRA conversions besides have costs. specifically, you ’ ll have to pay tax on the money that you convert. Because of this, you need to plan conversions cautiously .

Key Takeaways

  • A Roth individual retirement account (IRA) conversion lets you convert a traditional IRA into a Roth IRA.
  • You will immediately owe taxes due on the converted amount, but then qualified withdrawals in retirement will be tax free.
  • A conversion makes the most sense if you expect to be in a higher tax bracket in the future.
  • Due to tax laws passed in 2017, a conversion no longer can be reversed back to a traditional IRA.


Converting Traditional IRA Savings To A Roth IRA

The Benefits of Roth IRAs

Since Roth IRAs were foremost introduced in 1998, many owners of traditional IRAs have looked on them with envy. That ’ second because Roth IRAs have at least two advantages over the traditional kind :

  1. Any money that you withdraw from a Roth is tax free, provided you are age 59½ or older and it has been at least five years since you first contributed to a Roth. By contrast, the withdrawals that you make from a traditional IRA are taxed as ordinary income.
  2. Traditional IRA owners must start taking RMDs from their accounts by April 1 of the year following the calendar year when they reach age 72. (Prior to 2020, the required beginning age (RBA) had been 70½; for those who turned 70½ before year-end 2019, that remains their RBA.) Roth owners, however, can leave their accounts untouched until they need the money. And if they don’t need it, then they can pass the entire account to their heirs.

There is a tradeoff, though. Traditional IRA owners who qualify get a tax break for the money that they put into their accounts. Roth owners do not ; they put post-tax money into their score .

fortunately, for traditional IRA holders who would like to take advantage of a Roth, the law allows for conversions. At one clock, merely people with incomes under a certain amount could perform Roth IRA conversions, but the limits were lifted as of 2010. Income limits still apply to Roth contributions, however .

Whether a Roth conversion makes feel for you depends on a variety show of factors .

Advantages of Roth IRA Conversions

1. You Might Save on Taxes in the Long Run

When you convert some or all of the money in your traditional IRA to a Roth, you have to pay income tax that year on the convert total. even so, converting could be a fresh be active if you end up in a higher marginal tax bracket in late years or if tax rates rise overall .

once you pay tax on that money, it ’ sulfur tax exempt ever after, no matter how tax rates may change. And all the money that you earn in that score is tax release vitamin a good. Money in a traditional IRA grows tax release until you withdraw it. But once you take it out, you have to pay taxes on both the original contributions and what they earned over time .

“ When it comes to converting, time is of the essence for at least three reasons, ” says Matthew J. Ure, a retirement management analyst and fiscal planner in San Antonio .

first, Ure explains, the money put into a Roth must have five years to mature to protect any growth from taxes. “ Second, by staging the conversion over several years, you can minimize dislocation to your current tax position, ” Ure says. “ Finally, the ability to convert is not a proper guaranteed by the Constitution—rather, it is a loophole that opened up after the original legislative prohibition expired, and a loophole that has come under attack recently. ”

Although the Biden administration seems amenable to keeping conversions in play for immediately, statements by both political parties highlight the risk that one takes in deferring a desirable conversion, Ure adds .

2. You ’ ll Escape RMDs and Harsh Penalties

With traditional IRAs, you must start taking RMDs at age 72. otherwise, you ’ ll face a big tax penalty : 50 % of the amount that you failed to withdraw. And, of course, you ’ ll owe income tax on whatever you take out .

With a Roth, on the other bridge player, RMDs are never necessary during your life. If you have other sources of income and don ’ t need the money in your Roth for living expenses, you can keep it integral for your grateful heirs .

“ Roth IRAs can be a good estate of the realm and tax plan tool because they are not subject to RMDs. And sol long as you have earned income, you may continue making contributions at any age, ” says Stephen Rischall, a retirement planning expert and establish partner at Navalign Wealth Partners in Los Angeles .

But if you do need money, and you ’ re under senesce 59½, you can withdraw your contributions —though not the earnings—without any penalty .

3. It Could Be the merely Way to Get One

If you want a Roth, for inheritance or other purposes, but earn besides much to contribute to one, converting the money that you already have in a traditional IRA is your merely option .

Disadvantages of Roth IRA Conversions

1. You might Pay More in Taxes in the Long Run

Converting from a traditional IRA to a Roth can make sense if income tax rates ( yours personally, or the unharmed state ’ mho ) go up in the future. But if you ’ re likely to be in a lower tax bracket by and by, as many people are after they retire, then you would do better to wait .

2. You ’ ll Face a Big Tax Bill now

Depending on how much you convert, your tax bill could be hearty, and the money to pay it will have to come from somewhere. If you plan to cover the taxes by withdrawing extra money from your traditional IRA, you by and large will be subjugate to a 10 % early withdrawal penalty if you ’ re under age 59½ .

even if you aren ’ triiodothyronine penalized, you still will be reducing your retirement savings to pay the taxes. Taking the money from non-retirement accounts is a better theme, but not a perfect one. By giving it to the Internal Revenue Service ( IRS ) now, you ’ ll be sacrificing whatever it might have earned if you had kept it invested .

“ If you do a conversion, you should be able to pay the taxes with an outside source, ” says Morris Armstrong, fall through of Armstrong Financial Strategies in Cheshire, Conn. “ Otherwise, the mathematics does not favor the conversion. Always remember that you are not converting in a vacuum and the full video needs to be evaluated. ”


  • even though you ’ ll owe tax on the convert amount, you might save on taxes in the long ladder .
  • There are no needed minimum distributions ( RMDs ) during your life .
  • You can withdraw your contributions at any clock time .


  • You owe tax on the converted amount—and it could be substantial .
  • You may not benefit if your future tax bracket is lower than it is now .
  • You must wait five years to take tax-exempt withdrawals, even if you ’ re already age 59½ or older .

How to Do a Roth IRA Conversion

If you decide to convert, the simplest direction is to have the fiscal mental hospital that presently holds your traditional IRA transfer some or all of that money into a Roth. If you would quite move your score to another initiation, the new one should be more than happy to help you .

You besides could do the rollover yourself, withdrawing money from your traditional IRA and depositing it in a Roth account. This is the bad option, however. If you don ’ thyroxine complete the rollover within 60 days, the money becomes taxable and may be subject to penalties .

What ’ s more, it no longer will be in an IRA—Roth or traditional—and it will have lost the advantage of tax-deferred or tax-exempt increase .

Recharacterization : The Opposite of Conversion

Recharacterization was the reverse of an IRA conversion, such as from a Roth IRA back to a traditional IRA, generally to achieve better tax treatment. The strategy of recharacterizing from a Roth back to a traditional IRA was banned by the Tax Cuts and Jobs Act of 2017 .

Recharacterizations were largely performed after a conversion from a traditional IRA to a Roth IRA, though they could go the other direction as well. A traditional-to-Roth conversion could result in a meaning and unexpected tax burden—so much so that the person who had done the conversion could decide to undo it, which resulted in a recharacterization .

Is it worth converting a traditional individual retirement account (IRA) to a Roth IRA?

It depends on your individual circumstances. however, a Roth IRA conversion can be a very herculean creature for your retirement. If your taxes rebel because of increases in marginal tax rates—or because you earn more, putting you in a higher tax bracket—then a Roth IRA conversion can save you considerable money in taxes over the long term .

Can you avoid taxes on Roth IRA conversions?

No. When you convert tax-deferred money from a traditional IRA to a Roth IRA, you will pay taxes on the measure converted as if it were taxable average income .

How much can you convert from a traditional IRA to a Roth IRA?

The government merely allows you to contribute $ 6,000 immediately to a Roth IRA in 2021 and 2022—or $ 7,000 if you ’ rhenium age 50 or older, but there is no limit on how much you can convert from tax-deferred savings to your Roth IRA in a single class .

The Bottom Line

Converting a traditional IRA into a Roth IRA can provide tax-exempt income and estate-planning advantages in the future. But you ’ ll have to pay taxes on the money immediately, at what could be a higher rate than you ’ ll owe in retirement .

“ On a design note, it is constantly nice to have tax diversification among the types of retirement accounts you have, ” says David S. Hunter, a certified fiscal planner and president of Horizons Wealth Management in Asheville, N.C. Hunter says that this is primarily because “ without a crystal ball, we can not guarantee what tax rates will be in the future. Better to have the tools to react to any tax environment than to make an all-in count on what the rates will be. ”

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Category : Finance