Converting a Regular IRA to a Roth IRA
If you want to take advantage of the tax benefits of a Roth IRA and you already have a regular IRA, you may convert your traditional account to a Roth IRA. The IRS considers this conversion to be a rollover, and treats it accordingly. There are a number of different ways that you can roll over a regular IRA to a Roth IRA, but you must be aware of time limits on the conversion process. Once you've withdrawn your funds from a traditional IRA, you must convert the money to a Roth IRA within 60 days to avoid early withdrawal penalties.
Converting a regular IRA to a Roth IRA can give you more flexibility and financial freedom in retirement. When you reach the age of 59 1/2, you may withdraw tax free funds from a Roth IRA, provided that 5 years have passed since your first contribution. There are other cases in which you may be eligible for an early withdrawal from a Roth IRA, such as buying a first home or becoming disabled. Compare the benefits of a regular IRA and a Roth IRA with a knowledgeable financial professional and online retirement calculators to see how the conversion will affect your retirement planning goals.
How to Convert Your IRA
When you're ready to convert a regular IRA to a Roth IRA, you may do so by requesting a distribution from your traditional IRA, then using these funds to make your first contribution to a Roth IRA. After you withdraw the funds, you will have 60 days to complete the rollover. If the rollover has not been completed within 60 days, the distribution will be subject to early withdrawal penalties.
With a trustee to trustee transfer, the funds from your regular IRA are transferred directly to the trustee for your Roth IRA. The trustee is the investment firm or brokerage house that holds these accounts. When you switch to a new trustee, a new contract must be written, and administrative fees may apply when you are opening the new account.
You can also complete the Roth IRA conversion by having the funds transferred directly from a regular account to a Roth IRA held by the same trustee. In this case, you would simply ask the brokerage house or firm you are currently using to arrange the conversion for you. The regular IRA would be redesignated as a Roth IRA, and in most cases, you would not require a new contract. If you are happy with your current investment firm, redesignating your account may be the easiest, most cost effective way to complete the conversion.
Roth IRA Conversion Tax
Regardless of the type of rollover you choose, the converted funds will be subject to income tax. When you convert a regular IRA to a Roth IRA, you will be rolling over untaxed money to a tax free account. The contributions that you made to your regular IRA were taken from pre tax earnings, while the contributions you will make to your Roth IRA are taken from post tax income. Therefore, the regular IRA distribution must be included in your gross income for that year and taxed.
Converting a regular IRA to a Roth IRA gives you access to the benefits of a tax free account. Whether you're building retirement income, saving money for your first home, or simply looking for a tax free way to maximize your savings, a Roth IRA conversion can help you reach these goals. Compare the fees and investment strategies of several brokerages before you make this important decision about your financial future.
Did you Know?
The Roth IRA is a retirement account that is funded with post-tax income. You pay taxes on your income this year as you would during any year and invest the funds in the Roth. Since taxes have been paid before investing you never pay income taxes on those funds in the future.
