Free Roth IRA Conversion Guide, Get Started Today

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Moving from a traditional IRA to a Roth is becoming a popular transaction, however it can be one rife with rules and regulations which must be understood and navigated before the step can be made. A Roth IRA for many is a way to offer greater peace of mind due to the knowledge you will not be taxed in retirement.

When is a Roth Conversion a good Idea?

If you live on commission or are self employed you may have earnt a great deal of money one year, but the following year you (for whatever reason) are know expecting to earn far less, you can make a tatical move to convert to Roth as your tax bracket is far lower and you will benefit from the low tax rate you can have with a Roth, this is difficult to explain, but basically you will pay less income tax, especially if you successfully predict higher earnings or income tax increases the following year to this move.

Can High Earners Convert To Roth?

Yes, there are less restrictions surrounding this than there use to be, if however you do convert you must still stick with the maximum amount that you can contribute. You may also be taxed if your IRA funds were originally pre-tax, if your funds were originally post-tax then speak to one of our advisers, but chances are you will not have to pay any further tax on this.

Roth Conversion Rules & Tips

60 Day Rollover

Upon conversion you will have to take charge of the assets you want to roll over, if you do not then a number of consequences may apply: the amount of the distribution (less non-deductible contributions) will be taxable in the year received, the conversion will not take place, and the IRS 10% early distribution tax penalty will apply. Basically this is all just saying you will be taxed the full amount possible on everything, already defeating the whole object of the conversion.

Trustee-to-Trustee Transfer

To remove the possibility that your IRA transferred assets are untouchable to Mr. Tax Man tell your traditional IRA trustee to direct the money to the trustee of your Roth IRA account, this is the best way to avoid tax confusion.

Same Trustee Transfer

As an alternative to the above set up a Roth IRA account with the trustee who is holding your traditional IRA, then direct them to move the money from the traditional IRA into your Roth IRA account, with this method the money stays within the same institution meaning less steps are involved and its just quicker.

You can’t Just Convert Pre-tax Funds

A common mistake that individuals make is they believe they can choose exactly what funds to transfer, well sorry but it will not work like this. If you had say $100,000 sitting ion your IRA and $20,000 was your Income yield, $50,000 is tax deductible and then the remaining $30,000 was non tax deductible you cannot choose to transfer just the $30,000 hoping this will then be converted without tax. A simple calculation will be done to make this relevant to the amount you have in your Traditional IRA and then standard Roth tax rates will apply,… sorry but nice try.

Other Retirement Accounts You Can Convert Into a Roth IRA

You can convert to a Roth IRA from a number of retirement plans, pleas also see….

SIMPLE IRA (after two years)
457(b) Plan
403(b) Plan
Designated Roth Account (401(k), 403(b), or 457(b) )