How to Convert a Simple IRA
A Simple IRA is one of the most common types of employer-provided retirement savings plans in the United States. Like a 401(k) plan, a Simple IRA is funded with pretax dollars, which are taxed at ordinary income rates when they are withdrawn at retirement (typically when the account holder has reached 59 ½ years of age). A Simple IRA offers the account holder a way of deferring taxes on her income until much later. By contrast, a Roth IRA is funded with posttax dollars; however, the account holder pays no taxes on the capital gains realized on the invested funds. People often convert a Simple IRA to a Roth IRA in a year in which they have very little taxable income to minimize their overall tax liability.
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Instructions
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Gather the necessary forms from the IRS website. You will need blank copies of Form 1040, which is the U.S. Individual Income Tax Return, and Form 8606, which is the IRA conversion form. You will also need a completed copy of Form 1099-R from the previous tax year. Form 1099-R shows you the balance of your Simple IRA as well as any contribution you made to the IRA in the previous tax year. See Resources for links to the necessary forms.
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Complete Form 8606 by carefully following the instructions on the form. Enter the amount you contributed to your Simple IRA in the previous tax year on line 1 and enter the total balance of your Simple IRA on line 2. You can find both of these pieces of information on Form 1099-R. Mail the completed copy of Form 8606 to the IRS office in your area.
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Complete Form 1040 when you file your income taxes for the current tax year. Report the value of your Simple IRA that you are converting on line 16a. You will need to pay income taxes on the amount of the Simple IRA you are converting.
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Attach a copy of Form 8606 to Form 1040, and file both forms with the IRS by mailing them to the IRS office in your area.
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Tips & Warnings
Note that there are a number of restrictions on whether or not you can convert a Simple IRA. For one, your tax filing status must be single, married filing jointly or head of household. If you are married filing separately, you are not eligible to convert a Simple IRA. Additionally, your modified adjusted gross income must be $100,000 or less in the year of conversion. Finally, you must wait two years from the day you opened your Simple IRA to be eligible to convert it.
Keep in mind that you will have to pay ordinary income taxes on the total amount of your Simple IRA if you convert it to a Roth IRA. For example, if the total balance of your Simple IRA is $20,000 and your ordinary income tax rate is 30 percent, you will need to pay $20,000 x 30% = $6,000 in taxes to convert your Simple IRA. For this reason, you should only convert your Simple IRA if you have a very low ordinary income tax rate (such as if you leave work to pursue a graduate degree).
