How To Convert to a Roth IRA

There are a number of reasons to consider a Roth individual retirement account (IRA) rollover, which moves funds from an existing traditional IRA (or another retirement account) into a Roth IRA.

A Roth conversion is especially attractive if you expect your future tax rate to be higher than your current rate. And if your earnings are high enough to prevent you from contributing directly to a Roth IRA, you can use a Roth conversion as a backdoor entry into future tax-free income in retirement.

Here’s a quick look at how to convert to a Roth IRA, plus considerations when deciding whether it makes sense for you.

How to Roll Over Funds Into a Roth IRA

It is relatively easy, although it can be expensive, to roll funds into a Roth. In general, you follow this process:

1. Fund your traditional IRA or employer-sponsored 401(k). If you don’t have one already, you’ll have to open and fund one first.
2. Withdraw funds from your eligible retirement account. Once your plan gives you an eligible rollover check from your other retirement account, you will have 60 days to roll it into a Roth IRA.
3. Roll funds into a Roth IRA account. If you don’t have a Roth IRA yet, you’ll open one during the rollover.
4. Pay taxes on your contributions and earnings. You make Roth IRA contributions with after-tax dollars. If you already deducted your traditional IRA contributions, you’ll owe taxes now. This sounds like an easy enough step, but keep in mind that the tax burden could be substantial.

Roth IRA Conversion Methods

There are several ways to enact a Roth conversion, depending on where you hold your retirement accounts:

• With a 60-day indirect rollover, you receive a distribution in the form of a check paid directly to you from your traditional IRA. You then have 60 days to deposit it into your Roth IRA.
• A simpler way to convert to a Roth IRA is a trustee-to-trustee direct transfer from one financial institution to another. Tell your traditional IRA provider that you’d like to transfer the money directly to your Roth IRA provider.
• If both IRAs are at the same firm, you can ask your financial institution to transfer a specific amount from your traditional IRA to your Roth IRA. This method is called a same-trustee or direct transfer.

Converting from an Employer-Sponsored Plan

You can convert other retirement accounts, such as an employer-sponsored 401(k) or 403(b) plan, too, once you leave your job. Some plans let you access the money while you’re still working—an “in-service distribution.” However, you usually have to reach age 59½ before you can do so.

If you want to convert assets from your 401(k) or another employer-sponsored plan to a Roth IRA, make sure the money is transferred directly to the financial institution through a trustee-to-trustee transfer.

If your company issues the check to you, it must withhold 20% of the account balance for tax purposes. Then you’ll have just 60 days to deposit all the money into a new Roth account—including the 20% that you didn’t receive. That must come from another source. Miss the deadline and any money not rolled over to a Roth IRA will be subject to a 10% early withdrawal penalty if you’re younger than 59 ½.

Roth IRA Advantages

Roth IRAs offer several key benefits not offered by other retirement plans.

For starters, Roth IRA earnings grow tax-free, and withdrawals in retirement are tax-free, as well. Also, you can withdraw your contributions at any time, regardless of your age. What’s more, there are no required minimum distributions (RMDs) for Roth IRAs while you’re alive. That means, if you don’t need the money, you can leave the account alone and pass it to your heirs.

A Roth conversion is especially attractive if you expect your future tax rate to be higher than your current rate. And if your earnings are high enough to prevent you from contributing directly to a Roth IRA, you can use a Roth conversion as a backdoor entry into future tax-free income in retirement.

Should You Convert to a Roth IRA Now?

Once you’ve decided a Roth IRA is your best retirement choice, the decision to convert comes down to your current year’s tax bill. That’s because when you move money from a pre-tax retirement account, such as a traditional IRA or 401(k), to a Roth, you have to pay taxes on that income. It makes sense: If you had put that money into a Roth originally, you would have paid taxes on it for the year when you contributed.

Democrats tried to put a moratorium on backdoor Roth conversions, primarily for the wealthy through the Build Back Better bill, which was first introduced by President Joe Biden in 2020. The bill aimed to create RMDs for accounts that exceeded $10 million while closing the door on additional contributions. This would, thus, close loopholes used by many wealthy individuals. The bill did not pass and was replaced by the Inflation Reduction Act of 2022.

A Roth IRA rollover is most beneficial when:

• You have the cash on hand to pay the taxes. You may be tempted to use some of the converted funds to cover your taxes. But that means you’ll miss out on years or decades of tax-free growth on that money. And, you might owe a 10% penalty on the money.
• It doesn’t trigger onerous tax consequences. But be careful: The amount you convert, when you add it to your current year’s income, could move you into a higher tax bracket or subject you to taxes you otherwise wouldn’t pay. For example, retirees who convert assets to a Roth IRA could end up paying more tax on their Social Security benefits and higher Medicare premiums if the converted amount lifts their income above certain levels. A tax advisor can help crunch the numbers.
• Your existing IRA account has suffered recent losses. A lower balance in your traditional IRA means you’ll owe less tax at conversion time and have a greater potential for tax-free growth. If you convert existing retirement account balances to a Roth IRA this calendar year, you’ll pay the tax when you file your tax return at the tax deadline next year.
• You’re in a lower tax bracket than usual, perhaps because you worked less, switched jobs, or missed a bonus.
• You have more itemizable deductions than usual, which can help lower your taxable income.
• You earn too much to contribute to a Roth in the current year, but you expect to have a higher tax rate during retirement.

The Bottom Line

Converting to a Roth IRA is easier than ever. You can transfer some or all of your existing traditional IRA or employer-sponsored retirement account balance to a Roth IRA, regardless of your income. Once the conversion is complete, congratulate yourself. You’ve just signed on for years of tax-free growth. It can be all the difference between a stressful—and a blissful—retirement.