How to Convert a Traditional IRA to a Roth IRA Taxes
Traditional IRAs and Roth IRAs are investment accounts for people to save for retirement. A traditional IRA's earnings grow tax-deferred, and you can deduct the amount of your annual contribution. Account holders pay taxes on withdrawals and distributions, under specific rules. Roth IRAs offer no tax deduction for contributions, but because contributions are post-tax, you can withdraw them tax-free. To take advantage of a Roth IRA's benefits, some people convert their traditional IRAs to Roth IRAs and pay the associated taxes.
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Things You'll Need
- Form 1040 or Form 1040A
- Traditional IRA account number
- Roth IRA account number
Instructions
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Convert a traditional IRA into a Roth IRA via a transfer rather than a rollover, to streamline the process. With a transfer, the money is moved directly from your traditional IRA to your Roth IRA without your having to touch it or having money withheld by your financial institution. In a rollover, 80 percent of the conversion amount is paid to you, but you must redeposit it in the Roth IRA within 60 days. The other 20 percent is withheld for the payment of income taxes. Violating withdrawal rules will add a penalty to the withholding.
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Contact your financial institution to request the transfer to convert your money from a traditional IRA to a Roth IRA. You will need the account information for both accounts as well as your Social Security number. You should elect to pay the taxes on the money with outside funds, such as your checking account, rather than from the rollover, especially if you are under 59 1/2 years old, because the money may be considered distributed from the account. If you are under 59 1/2, the money would be considered an early distribution for which you would have to pay a 10 percent penalty.
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Receive a form 1099-R from your financial institution at the end of the year showing the amount of the conversion.
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Report the amount of the conversion on your tax return as a taxable IRA distribution. For 2010 tax returns, this is on line 16a and 16b of form 1040 or lines 12a and 12b on form 1040A. This amount will be included in your taxable income.
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References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
