Time to Consider a Roth Conversion?

Some retirement savers find it beneficial to convert funds from a traditional IRA to a Roth IRA – known as a Roth conversion.

A Roth IRA conversion is a taxable movement of assets from a tax-deferred account (taxes have not been paid on contributions) to a tax-free account (taxes have been paid on contributions).

Unlike the traditional IRA, the Roth IRA offers account holders the ability to take tax-free withdrawals in retirement, provided the qualifications are met. Since Roth IRAs weren’t available until 1998 – more than a decade after the Traditional IRA was created – the Roth conversion is a strategy many individuals haven’t heard much about.

[Related: Traditional IRA vs. Roth IRA: FAQ]

Roth conversion: how it works

How can an IRA to Roth conversion be done? From the IRS, there are three ways to convert funds from a traditional IRA to a Roth IRA:

1. Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
2. Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
3. Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

A useful reference is IRS Publication 590-A, which provides information on opening and the different ways of funding traditional and Roth IRAs.

How a Roth conversion affects taxes

A Roth conversion has tax implications in the year you convert because funds are moved from one tax environment to another.

Consulting with your financial professional is important to understand and determine if converting to a Roth is appropriate for your financial goals. Your financial professional can also help you plan for the impact of this taxable event.