IRA to Roth Conversion: Unlock Tax-Free Growth

What is an IRA to Roth Conversion?

According to the IRS, “A Roth IRA is a type of tax-advantaged account that can help you meet your retirement goals. Unlike a traditional IRA, where contributions are tax-deductible and all future withdrawals are taxed, qualified Roth distributions including earnings are tax-free.”¹

How Does It Work?

When you convert funds from a traditional IRA to a Roth IRA, you’ll have to pay income taxes on the amount converted in the year of the conversion. However, once the funds are in the Roth IRA, they can grow tax-free, and qualified withdrawals in retirement are also tax-free.²

Who Is It For?

An IRA to Roth conversion can be an excellent strategy for individuals who:

1. Expect to be in a higher tax bracket during retirement
2. Have funds available to pay the taxes due on the conversion.
3. Want to leave tax-free income to their beneficiaries.

What are the Tax Implications?

When you convert funds from a traditional IRA to a Roth IRA, the converted amount is treated as taxable income for that year. This means you’ll owe income taxes on the converted amount, but future qualified withdrawals from the Roth IRA will be tax-free.³

Do You Have to Pay Taxes Immediately on a Roth Conversion?

Yes, you’ll need to pay income taxes on the converted amount in the year of the conversion. The IRS requires that you include the converted amount as part of your taxable income for that year.⁴

How Much Tax Will I Pay if I Convert My IRA to a Roth?

The amount of tax you’ll pay depends on your current income tax bracket and the amount you convert. The IRS does not currently provide a calculator or chart to estimate the potential tax impact. To accurately assess the tax implications, it’s best to consult with a qualified financial advisor or tax professional who can evaluate your specific situation and provide personalized guidance.⁴

Can I Convert a Traditional IRA to a Roth IRA Without Paying Taxes?

Unfortunately, it’s not possible to convert a traditional IRA to a Roth IRA without paying taxes on the converted amount. The IRS requires that you include the converted amount as taxable income in the year of the conversion. However, you may be able to spread out the tax impact by completing a series of partial conversions over multiple years.³

Roth Conversion Limits

While there are no income limits for conversions, there are limits on how much you can contribute to a Roth IRA each year. For 2023, the maximum contribution limit is $6,500 (or $7,500 if you’re age 50 or older).³

Roth Conversion Rules

The IRS has specific rules governing Roth IRA conversions, including:

• You must include the converted amount as taxable income in the year of the conversion.
• You can’t convert required minimum distributions (RMDs) from traditional IRAs.
• You can’t re-characterize (reverse) a Roth conversion once it’s been completed.³

Converting IRA to Roth After Age 60 or 72

Converting your IRA to a Roth IRA after age 60 or 72 comes with unique considerations and potential benefits:

Converting After Age 60

• No Early Withdrawal Penalties: After age 59½, you can withdraw from your IRA without incurring a 10% early withdrawal penalty, making it easier to pay conversion taxes.
• Strategic Timing: Converting at this stage can help manage your tax bracket, especially if you expect higher future tax rates.
• Medicare Considerations: Large conversions can increase your income and potentially raise your Medicare premiums.⁵

Converting After Age 72

• Required Minimum Distributions (RMDs): You must take RMDs from your traditional IRA, but you can still convert amounts above the RMD.
• Tax Planning: Converting post-RMD can reduce the size of future RMDs and provide a tax-free inheritance for your heirs.
• Legacy Planning: Roth IRAs do not have RMDs during the account holder’s lifetime, offering greater flexibility for estate planning.⁶

IRA to Roth Conversion Calculator

The IRA to Roth conversion calculator is a valuable tool provided by Bankrate that helps you estimate the impact of converting a traditional IRA into a Roth IRA on your retirement net worth. By entering details such as your current IRA balance, anticipated annual return, and tax rates, the calculator can offer a comparative analysis of the potential benefits and impacts of conversion. This can be crucial in deciding whether converting to a Roth IRA aligns with your retirement planning goals.

For a tailored strategy, consider a flat fee financial advisor’s guidance on tax effects and long-term gains to ensure it complements your retirement plan.

How to Do a Roth Conversion

1. Decide how much you want to convert and ensure you have funds available to pay the taxes.
2. Contact your IRA custodian and request a Roth conversion.
3. Provide your custodian with instructions on which accounts to convert from and to.
4. Report the converted amount as taxable income on your tax return for that year.7

Ready to Unlock Tax-Free Growth?

An IRA to Roth conversion can be a powerful tool for maximizing your retirement savings and enjoying tax-free growth. However, it’s essential to carefully consider the tax implications and ensure it aligns with your overall financial goals.

Contact Facet, a personalized and flat-fee financial services company, to assist you in navigating the Roth conversion process and help you make the most of your retirement savings.