What Is a Roth IRA Conversion?

A Roth IRA conversion involves transferring retirement assets from a traditional, simplified employee pension (SEP), or 澳洲幸运5官方开奖结果体彩网:SIMPLE IRA, or from a 澳洲幸运5官方开奖结果体彩网:defined-contribution plan such as a 401(k) into a Roth IRA. While the account owner has to pay income tax on the money they convert, they will be eligible to make tax-free withdrawals from the account in the future.

How a Roth IRA Conversion Works

A conversion may be accomplished in seve༒ral ways.

1. A direct rollover from a defined-contribution plan, such as a 401(k) or 403(b), if you're leaving your job or if you left an account behind with a former employer. The plan's administrator can send the money to your new account or give you a check made out to the new account that you can then deposit.
   
2. A trustee-to-trustee transfer, in which the assets are directly transferred from the financial institution, or trustee, where your traditional IRA is held and the one where your new Roth IRA will be held. It can be the same financial institution or a same-trustee transfer.
3. A 60-day rollover, in which the money is paid to you and you then deposit all or part of it in a Roth IRA within 60 days.

The first two methods are generally the safest and most practical. With a 60-day rollover, if you fail to deposit the money within that time, it will be treated as taxable income, and you may also face a 10% tax on early distributions if you're under age 59½.

In addition, 60-day rollovers can be subject to 10% tax withholding. If you roll over a $10,000 IRA, you'd only receive $9,000, and if you want to put the full $10,000 into your Roth account, you'd have to come up with $1,000 from another source.

When Roth IRA Conversions Make Sense

The major advantage of converting a traditional IRA or 401(k) into a Roth IRA is the ability to make tax-free 澳洲幸运5官方开奖结果体彩网:withdrawals in the future. That can be particularly appealing if you expect to be in a higher marginal 澳洲幸运5官方开奖结果体彩网:tax bracket in retirement.

While most people's incomes and tax brackets decline in retirement, that isn't always the case. For example, if you have a lot of money in traditional IRAs, your 澳洲幸运5官方开奖结果体彩网:re�✨�quired minimum distributions (RMDs) starting at age 73 could boost your income substantially.

In addition, tax brackets and rates cannot be predicted. If taxes go up by the time you retire, 澳洲幸运5官方开奖结果体彩网:converting a traditional IRA or S꧑EP and taking the tax hit now rather than late൲r could make sense in ꦚthe long run.

Another 澳洲幸运5官方开奖结果体彩网:consideration involves estate plan💖ning. Roth IRAs, unlike other types of retirement accounts, are never subject to required minimum distributions during your lifetime. So, if you don't need t♋he money for living expenses, you can allow it to grow undisturbed and leave it to your heirs someday.

If the account beneficiary is your spouse, they won't have to take RMDs either. Other types of beneficiaries, such as children, will eventually have to take distributions, but as long as they follow the rules, those distributions will be tax-free.

Example of a Roth IRA Conversion

By timing your 🔯conversion carefully and possibly spreading it ovꦏer several years, you may be able to ease the tax burden.

Suppose, for example, that you're single, will earn a taxable income of $90,000, and have $100,000 in a traditional IRA that you'd like to convert into a Roth. Based on your taxable income, your highest marginal tax bracket is 22% in 2024 and 2025.

Because the 22% bracket ends at $103,350 ($100,525 for 2024), you could convert up to $13,350 this year ($103,350 minus $90,000) and pay no more than 22% tax on the money. If you were to convert the entire $100,000, the remaining $86,650 would be taxed at the next highest tax bracket of 24%.

In this case, you could save some money by spreading your conversion over several tax yea✤rs.

The Bottom Line

A Roth IRA conversion allows you to turn a traditional IRA or 401(k) plan account into a Roth. You'll have to pay income tax on the money you convert, but you'll be able to take tax-free withdrawals from the Roth account in the years to come. Roth IRA conversions make the most sense if you expect to be in a higher tax bracket after you retire or if tax rates in general rise significantly in the future.