Can i convert an ira to a roth

1It may also be possible to convert assets from pretax to Roth within a retirement plan such as a 401(k). While many of the planning principles are the same, this paper focuses on conversions of IRAs.
2A qualified distribution is tax-free if taken at least 5 years after the year of your first Roth contribution AND you’ve reached age 59½, become disabled, died, or you meet the requirements for a first-time home purchase. If the distribution from your Roth IRA is not qualified, the earnings may be taxable. Additional taxes may apply for early withdrawals.
3This analysis builds upon T. Rowe Price’s February 2015 paper by Judith Ward, CFP®, “How to Minimize Unwanted RMDs Using a Roth IRA Conversion Strategy.”
4Assumptions for all cases: A married couple has an annual household income of $200,000 and is in the 24% federal tax bracket. The income level is such that Roth conversions ($40,000 annually during the relevant years) do not change their federal tax bracket. State income taxes are not considered. (This approximately reflects the state tax rate not changing from working years to retirement.) The couple has $500,000 saved in Traditional IRAs that they do not expect to need for retirement income. The fact that they have other income sources is important, but the analysis does not need to reflect those assets or cash flow streams. One spouse contributes $7,000 annually to a Traditional IRA from age 55 until age 65. The couple also has $130,000 in a taxable account that can be used to pay taxes on the Roth conversion (using assets without gains, so there is no additional tax due to liquidation). This account will also be used to invest RMDs from the Traditional IRAs (since RMDs are not needed for retirement spending). All accounts have 6% annual investment returns, before taxes. All capital gains are taxed at the 15% rate. RMDs are assumed to be taxed at the marginal rate (not across multiple tax brackets), which stays steady through retirement. RMDs are based on rules in effect on January 2, 2022.
5Kutner, George W.; Doney, Lloyd D.; Trebby, James P. Investment Performance Comparison Between Roth And Traditional Individual Retirement Accounts. Journal of Applied Business Research (JABR), [S.l.], v. 17, n. 1, Feb. 2001. ISSN 2157-8834.
6This analysis assumes the taxable account generates only earnings at 0% or capital gains rates, not at ordinary rates. (This reflects a person who carefully manages assets across account types.) It also assumes the heirs’ tax rate is the same as the person’s tax rate during retirement. Starting amounts in the accounts, as well as the amount of annual conversions, are adjusted proportionally based on approximate income levels for the starting tax brackets. The analysis is based on starting conversions at age 55. Other assumptions are consistent with the analysis summarized in Figure 1.

Important Information

This material has been prepared by T. Rowe Price Investment Services, Inc., for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments or investment management. T. Rowe Price Investment Services, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of September 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. All investments involve risk. All charts and tables are shown for illustrative purposes only.

An IRA should be considered a long-term investment. IRAs generally have expenses and account fees, which may impact the value of the account. Nonqualified withdrawals may be subject to taxes and penalties. Maximum contributions are subject to eligibility requirements. For more detailed information about taxes, consult IRS Publication 590 or a tax professional regarding personal circumstances.

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Roth IRA conversion definition

A Roth IRA conversion shifts money from a traditional IRA or a qualified employer sponsored retirement plan into a Roth IRA. These conversions are ideal for people who want tax-free investment earnings, to lower taxable income in retirement or don't want to bother with required minimum distributions.

Also sometimes called a backdoor IRA conversion, Roth IRA conversions are accessible to almost anyone, which you'll learn more about below.

A Roth IRA conversion could be right for you if...

Generally, a Roth IRA is an excellent choice when any of the following situations apply:

• If you like the idea of your investment earnings growing tax-free.

• If you want the ability to lower your taxable income in retirement.

• If you think your tax rate in retirement may be higher than it is now.

• If you want to avoid required minimum distributions, which the IRS mandates at age 72 from a traditional IRA.

» Use our Roth IRA calculator to discover how much you could save in taxes by converting

A Roth IRA conversion might be wrong for you if...

There are some instances in which a Roth conversion may be more trouble than it’s worth:

• If you lack the cash to pay the likely tax bill generated by the conversion. Some people pay the tax bill with part of the converted balance, but that sacrifices some of the tax-free investment growth. And if you’re under 59½, you may open yourself up to a 10% tax penalty on that money.

• If you need the money in the next five years. Distributions of earnings and rolled-over amounts risk being hit with income taxes and even that 10% penalty from the IRS if they’re withdrawn before the five-year mark. Learn more about the Roth five-year rules if you fall into this category.

• If the rollover will subject you to a higher marginal tax bracket the year of the switch. This increase may make the strategy less attractive in some cases.

How to convert to a Roth

Here are the essential steps in a Roth IRA conversion. You can skip step No. 1 if you already have a traditional IRA.

1. Put money in a traditional IRA account. If you don’t already have an account, you will need to open an IRA and fund it.

2. Pay taxes on your IRA contributions and gains. Only post-tax dollars get to go into Roth IRAs. So if you deducted your traditional IRA contributions, you’ll need to give that tax deduction back, effectively. Those IRA contributions, and any investment gains, will be added to your taxable income when you file your tax return for the year.

3. Convert the account to a Roth IRA. If you don’t already have a Roth IRA, you’ll open a new account during the conversion. Your IRA administrator will give you the instructions and paperwork. Here are our picks for the best Roth IRA providers.

To stay in sync with IRS Roth IRA conversion rules, you’ll want to convert your traditional IRA to a Roth IRA in one of the following ways:

• Indirect rollover: You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days.

• Trustee-to-trustee or direct rollover: You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution.

• Same trustee transfer: If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

You may be able to do a rollover of a 401(k), 403(b) or other employer-sponsored retirement fund to a Roth if you are no longer working for the company, but as with the traditional-IRA-to-Roth rollover, you’re likely to trigger a tax bill here, too, unless you’re starting with a Roth 401(k).

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How do I avoid taxes on a Roth IRA conversion?

You can't necessarily avoid taxes altogether when doing a Roth conversion, but you can reduce the amount of taxes you owe on the rollover. Consider timing it in one of these ways:

• In a year you fall in a lower tax rate than normal. Maybe you switched jobs, had a period of unemployment or didn’t qualify for your usual bonus.

• When your traditional IRA account balance is down. If the market takes a hit and your IRA feels the aftershock, that could be an opportune time to launch this strategy.

• Early in the tax year. Taxes don’t have to be paid in full until April the following year, so converting early in the calendar year gives you more time to pay Uncle Sam. (If you pay estimated taxes, you might have to make payments sooner.)

• Bit by bit, as you can afford to pay the taxes. You do not have to convert your full balance. (You can’t, however, convert only the portion of your balance that wouldn’t be taxed, like nondeductible contributions. The IRS is on to that strategy.)

» Still uncertain? If you need some guidance on picking the best account for you, check out our full list of the best Roth IRAs. We compare providers across a variety of metrics, including fees, minimum account balance and tools.

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