How to Convert a Traditional IRA to a Roth IRA & the Tax Consequences

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Roth conversions must be reported on your taxes.
Roth conversions must be reported on your taxes. (Image: tax forms image by Chad McDermott from Fotolia.com)

Traditional IRAs and Roth IRAs are two types of individual retirement accounts used to save for retirement. Traditional IRAs offer a tax deduction for contributions, but withdrawals from the account are included as taxable income. Roth IRAs give no tax breaks for contributing, but allow the money to be withdrawn tax-free at retirement. The Internal Revenue Service allows you to convert from a traditional IRA to a Roth IRA, but you must report the conversion amount as taxable income.

Set up a direct conversion by informing the custodial institution of your traditional IRA of your decision to move the money to a Roth IRA. You will need to provide the account information for your Roth IRA.

Pay the estimated tax withholding from other accounts, such as a checking or savings account, instead of having the money taken from the conversion amount. If you are younger than age 59 1/2, you will have to pay a 10-percent early withdrawal penalty if you use money from the conversion for taxes. Regardless of your age, you will be shrinking your retirement savings if you use the money in the conversion for the taxes.

Complete Part II of Form 8606 to determine how much of your conversion is taxable. Unless you have made non-deductible contributions to your traditional IRA, which are rare, the entire conversion is taxable.

Report the total amount of the conversion on Line 11a of Form 1040A or Line 15a of Form 1040. Report the taxable portion, as figured from Form 8606, on Line 11b of form 1040A or Line 15b of Form 1040. The taxable amount will be included in your income taxes.

Tips & Warnings

  • Starting in 2010, you can convert money to a Roth IRA regardless of how much income you have.
  • You must wait at least five years from the time of the conversion before you can withdraw the converted funds from your Roth IRA.

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