Wondering how to convert to a Roth IRA? Here are some answers.

So you’ve decided that a Roth IRA is the best retirement account for you, but all your money is socked away in a traditional IRA or employer-sponsored plan? Not a problem.

Converting to a Roth IRA is easier than ever. You can transfer some or all of your existing balance in a traditional IRA to a Roth IRA, regardless of income (but income-eligibility restrictions still apply to current-year contributions).

You can convert all or part of other retirement accounts, such as an employer-sponsored 401(k) or 403(b) plan, too, once you leave your job—or in some cases, even while you continue to work for the same employer. Some plans allow you to access the money while you are still working, known as an “in-service distribution.” However, you usually have to reach age 59½ before you can do so.

A Roth conversion is attractive if you expect your future tax rate to be higher than your current rate. And if your earnings are high enough to prevent you from contributing directly to a Roth IRA, you can use a Roth conversion as a back door entry into future tax-free income in retirement.

Should you convert to a Roth IRA now?

Once you’ve decided a Roth IRA is your best retirement choice, the decision to convert comes down to your current year’s tax bill. That’s because when you move money from a pre-tax retirement account such as a Traditional IRA or 401(k) to a Roth, you have to pay taxes on that income. It makes sense: If you had put that money into a Roth originally, you would have paid taxes on it for the year when you contributed.

A Roth conversion is most beneficial when:

  • You earn too much to contribute to a Roth in the current year, but you expect to have a higher tax rate during retirement.
  • The amount being converted, when added to your current year’s income, doesn’t trigger onerous tax consequences such as moving you into a higher tax bracket or subjecting you to taxes you otherwise wouldn’t pay. For example, retirees who convert assets to a Roth IRA could end up paying more tax on their Social Security benefits and higher Medicare premiums if the converted amount lifts their income above certain levels. A tax advisor can help crunch the numbers.
  • When your existing IRA account has suffered recent losses. A lower balance in your traditional IRA means you will owe less tax at conversion time and have a greater potential for tax-free growth. If you convert existing retirement account balances to a Roth IRA this calendar year, you will pay the tax when you file your tax return at the tax deadline next year.

How to convert

Most major brokerage firms make it easy to convert to a Roth IRA. The simplest way is a direct trustee-to-trustee transfer from one financial institution to another. If you plan to keep your money at the same firm, you can simply tell your financial institution to redesignate your traditional IRA as a Roth IRA rather than opening a new account.

If you want to convert assets from your 401(k) or other employer-sponsored plan to a Roth IRA, make sure the money is transferred directly to the financial institution. If your company issues the check to you, it must withhold 20 percent of the account balance for tax purposes.You’ll have just 60 days to deposit all the money in a new Roth account—including the 20 percent that you didn’t receive. Miss the deadline and any money not rolled over to a Roth IRA will be subject to a 10 percent early withdrawal penalty if you are younger than 59 ½—on top of the income taxes you will owe on the entire converted amount.

Once the conversion is complete, congratulate yourself: You’ve just signed on for years of tax-free growth. It can be all the difference between a stressful—and a blissful—retirement.

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