How to Convert an IRA to a Roth

The IRS offers three different ways for you to convert your IRA into a Roth type IRA. No matter which method you use, you must first make sure you are eligible to convert your IRA to a Roth. At the time of this writing, one must have an adjusted gross income of less than 100,000 and cannot be married filing a separate tax return to be eligible. As opposed to a traditional IRA, a Roth IRA provides the benefit of tax free earnings, however your contributions to a Roth IRA are not tax deductible as they are with a traditional IRA. If converting to a Roth IRA makes financial sense for you, use one of the following methods to convert.

Difficulty: Moderate

Instructions

Things You'll Need:

• A traditional IRA

1. Rollover your distribution into a Roth IRA. The first way to convert your IRA to a Roth is to rollover your withdrawals, called "distributions", into a Roth IRA. After receiving a distribution, contact the financial institution that manages your IRA, also called the "trustee", and let them know you want to rollover your distribution into a Roth type IRA. Your trustee will have you complete any documentation required to complete this process. To avoid any penalties associated with withdrawing funds from a traditional IRA, you must make sure to rollover your funds within 60 days of receiving them. You are allowed to do one rollover per year. When you complete a rollover, you will receive a form 1099-r and must report the amount listed as income when filing taxes for that year.

2. Transfer your IRA to a new trustee. The IRS refers to this method as a "trustee to trustee" transfer. This method requires that you set up an account with the new trustee first before your funds can transferred to your new account. Once you have chosen the financial institution that you will transfer funds to, contact them and complete the paperwork required to open a new account for your Roth IRA. After your account is set up, you will need to contact your current provider to let them know of your desire to transfer funds and they will send your money to your new plan. Unlike the rollover method where you are limited to one rollover per year, you can perform as many trustee to trustee transfers as you wish in a year.

3. Same trustee transfer. The last method the IRS provides for converting your IRA to a Roth, is called a "same trustee transfer". This is when you transfer your IRA to a new account provided by the same trustee. A same trustee transfer differs from a rollover in that you do not receive the funds like you would if you received a rollover distribution. This is important because when you receive the funds yourself, you are required to report them as income when filing taxes. When you do a same trustee transfer you will not receive form 1099-r, but will need to pay tax on the converted funds. To complete a same trustee transfer, contact your trustee with your intention and they will complete this for you.

Tips & Warnings

• Starting in 2010 the income eligibility requirements will be lifted.
• A Roth IRA is considered advantageous because of: tax free earnings, ability to continue to contribute to a Roth IRA even after age 70.5, penalty free withdrawals
• Rollover your IRA distribution within 60 days to avoid tax penalties.