How to Convert an IRA to a Roth IRA for Taxes

IRA conversions are included as taxable income.

Traditional IRAs and Roth IRAs are two types of individual retirement accounts. However, they differ significantly on the tax benefits offered. A traditional IRA allows you to deduct contributions, but withdrawals are taxed. A Roth IRA does not grant a tax break for contributions, but withdrawals at retirement are tax-free. Most people choose to convert money from a traditional IRA to a Roth IRA for the tax benefit of being able to withdraw money from the account tax-free at retirement. However, you may also want to convert because Roth IRAs are not subject to required minimum distributions or because you want to consolidate your retirement accounts.

Difficulty:

Moderate

Instructions

1. Contact your financial institution to set up an IRA conversion. You will need to provide your account information, as well as the information for the Roth IRA that the money will be transferred to.

2. Wait to file your taxes until you receive a form 1099-R that shows that amount of the conversion.

3. Complete form 8606, part II, to determine the taxable amount of the conversion. Unless you made nondeductible contributions to the traditional IRA, the entire amount will be taxable.

4. Report the total amount of your conversion on either line 11a if you use Form 1040A or 15a if you use form 1040. Report the taxable portion on line 11b of Form 1040A or 15b of Form 1040. Only the taxable portion will be included when your income is totaled.

Tips & Warnings

• Beginning in 2010, the IRS no longer restricts conversions to Roth IRAs based on income.

References

• IRS: Publication 590 (2009), Individual Retirement Arrangements (IRAs)
• Money Zine: 2010 Roth IRA Conversions
• IRS: Form 1040 Instructions

Resources

• IRS: Form 8606
• IRS: Form 1040A
• IRS: Form 1040