Tax Implications of Rolling Over a Traditional IRA to a Roth IRA
Rolling over your traditional Individual Retirement Account assets to a Roth IRA can be a smart move that allows you to take advantage of tax-free distributions after retirement. However, you will owe income taxes on the rollover amount.
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Significance
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If you took a deduction for your traditional IRA contributions, you must pay income taxes on these amounts if you roll them into a Roth IRA. However, you do not have to pay taxes on any nondeductible traditional IRA contributions you roll into a Roth IRA. The rationale behind this is that Roth IRA contributions are taxed.
Benefits
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If you have significant earnings accumulated in your traditional IRA accounts, you could end up with a large tax bill the year you make the rollover. However, it may be worth it if you think your income tax rate will be higher in the future, after you retire and begin taking distributions.
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Considerations
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If you request a trustee-to-trustee transfer to move your funds from your traditional IRA to a Roth IRA at a new institution, you won't owe any penalties associated taking an early withdrawal from your traditional IRA.
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