Roth IRA
Conversion Rules
In a Roth IRA conversion, you can roll funds from a pretax retirement account, like a traditional IRA, into a Roth, thus avoiding income taxes on the distributions in retirement. But the conversion rules may mean you owe income tax now on the money you convert. And, depending on how much money you convert to a Roth IRA, you may find yourself in a higher marginal tax bracket because of the additional taxable income.
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Compare partial and staged conversions tailored
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How to Convert to a Roth IRA
Converting all or part of a traditional IRA to a Roth IRA is a fairly straightforward process. The IRS describes three ways to go about it:
Rollover
A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.
IRA to transfer
A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.
Same-Trustee transfers
A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.
Roth Accounts: Tax-Free Growth and Flexible Withdrawals
Roth accounts (Roth IRAs and Roth 401(k)s) let your contributions grow tax-free and provide tax-free qualified withdrawals in retirement, making them a powerful tool for long-term tax planning. We evaluate whether Roth contributions, conversions, or a Roth ladder fit your situation by considering current versus expected future tax rates, your time horizon, income limits, and estate goals. Strategies include backdoor Roth for high earners, strategic Roth conversions spread across years to manage tax brackets, and using Roth balances for tax-efficient legacy planning or to reduce RMD-driven taxable income.
The result: improved after-tax retirement cash flow, greater withdrawal flexibility, and useful tax diversification alongside traditional pre-tax accounts.
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Beware of the 5-Year Rule
One potential trap to be aware of is the so-called "five-year rule." You can withdraw regular Roth IRA contributions tax- and penalty-free at any time or any age. Converted funds, on the other hand, must remain in your Roth IRA for at least five years. Failure to abide by this rule will trigger an unwelcome 10% early withdrawal penalty. The five-year period starts at the beginning of the calendar year that you did the conversion. So, for example, if you converted traditional IRA funds to a Roth IRA in November 2023, your five-year clock would start ticking on Jan. 1, 2023, and you'd be able to withdraw money without penalty anytime after Jan. 1, 2028. Remember, this rule applies to each conversion, so if you do one in 2023 and another in 2024, the latter transfer will need to be held in the account for a year longer to avoid paying a penalty. One advantage Roth IRAs have over traditional IRAs is you won't have to take required minimum distributions (RMDs)—something to think about if you hope to leave the money to your heirs.
5-Year Rule
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Does a Roth IRA Conversion Make Sense for You?
When you convert from a traditional IRA to a Roth, there's a tradeoff. You will face a tax bill-possibly a big one-as a result of the conversion, but you'll be able to make tax-free withdrawals from the Roth account in the future.
One reason that a conversion might make sense is if you expect to be in a higher tax bracket after you retire than you are in now. That could happen, for example, if your income is unusually low during a particular year (such as if you're laid off or your employer cuts back on your hours) or if the government raises tax rates substantially in the future.
Another reason that a Roth conversion might make sense is that Roths, unlike traditional IRAs, are not subject to required minimum distributions (RMDS) after you reach age 73 (starting in 2023) or 75 (starting in 2033). So, if you're fortunate enough not to need to take money from your Roth IRA,
you can just let it continue to grow and leave it to your heirs to withdraw tax- free someday.
Moreover, you can continue to contribute to your Roth IRA regardless of your age, as long as you're still earning eligible income. Since January 2020, you can also keep contributing to a traditional IRA (previously you had to stop at age 701⁄2).
How Much Tax Will I Pay If I Convert My Traditional IRA to a Roth IRA?
Traditional IRAs are generally funded with pretax dollars; you pay income tax only when you withdraw (or convert) that money. Exactly how much tax you'll pay to convert depends on your highest marginal tax bracket. So, if AMP RETIREMENT you're planning to convert a significant amount of money, it pays to calculate whether the conversion will push a portion of your income into a higher bracket.
Is There a Limit to How Much You Can Convert to a Roth IRA?
You can convert as much as you like from a traditional IRA to a Roth IRA, although it's sometimes wise to spread these transfers out for tax purposes.
What Happens When You Convert to a Roth IRA?
When you convert a traditional IRA to a Roth IRA, you pay taxes on the money you convert in order to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future.
What Is the Downside of Converting From a Traditional IRA to a Roth IRA?
The most obvious downsides are the hit to your current tax bill-your IRA withdrawal amount will count as taxable income for that year—and that you can't touch any of the money you convert for
at least five years unless you pay a penalty.
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