How to Change a Traditional IRA to a Roth IRA

As of 2010, IRS regulations on income limits for converting a traditional IRA into a Roth IRA have been lifted; anyone can convert regardless of household income. Converting requires paying the taxes on the deferred traditional IRA. If you convert in 2010, you can spread the tax bill over two years: 2011 and 2012. Converting a traditional IRA into a Roth usually only requires one form with your IRA custodian and notating the amount on your taxes.

Instructions

1. Call your traditional IRA custodian and request a "Roth Conversion Form." Fill out the form and submit it to the custodian.

2. Confirm that the conversion took place. You should receive a statement within 30 days with the IRA title reflecting the change with a title starting something like, "XYZ Firm Custodian of Roth IRA for Jane Smith."

3. Wait for the Form 5498 to arrive from the IRA custodian reflecting the amount of the conversion as well as the 1099-R. The conversion amount is reflected in Box 7 of the 1099-R with the code "2" or "7." A "2" represents a conversion under the age of 59 1/2 and a "7" represents a conversion over age 59 1/2.

4. File your taxes with Form 1040 or 1040A and include Form 8606. Line 8 on Form 8606 notes the converted amount. Note the result of Form 8606 on Line 15b of Form 1040 or 11b of Form 1040A.

Tips & Warnings

• Consult a tax adviser regarding the benefits of converting a traditional IRA into a Roth and whether the long-term tax-free benefits outweigh the short-term tax consequences.

References

• IRS: Form 8606
• Vanguard: Roth IRA conversions and recharacterizations
• IRS: Roth IRAs