The only constant in life is change. So you might find that your current retirement account is no longer the best option for you.
If you find yourself in that position, consider converting your traditional IRA or employer retirement plan to a Roth IRA. You'll pay federal income tax in the year of the conversion on any amount that hasn't already been taxed.1
There are different implications depending on the type of account you wish to convert. It’s important to consider the benefits of each type of retirement plan, the options you have under each, and your own financial situation to make an informed choice. Check out Making Sense of Rollovers and Transfers for more rollover basics. It may also be a good idea to check in with your tax advisor to help decide if a Roth IRA conversion is good for you.
- Assets convert from one type of account to another type of account (like a traditional IRA or employer retirement plan) to a Roth IRA.
- Part or all of the distribution may be subject to income tax.
- The 10% early withdrawal penalty does not apply to the amount converted.
- Must satisfy any required minimum distribution, prior to conversion.
Keep in mind
- If you use assets from the account you are converting to pay the taxes on the conversion, that amount may be subject to taxes and the early withdrawal penalty if you are under age 59½.
- If you choose to have the funds distributed directly to you and want to put them into your Roth IRA as a conversion, you must deposit them into the Roth IRA within 60 days of the date of the distribution. This would not count as a rollover for purposes of the one rollover per year rule.
- Roth IRA conversions are subject to a separate 5 year tracking period for purposes of determining if a distribution of the converted amount is subject to the 10% early withdrawal penalty.