Can you convert to a Roth IRA?

Quick Summary

  • You can’t contribute directly to a Roth IRA if your income is too high.
  • A Roth conversion is a legal way to get around income limits by turning a traditional IRA into a Roth IRA.
  • You have to pay taxes on the money you convert to a Roth IRA.

One of the primary benefits of using a Roth IRA is that you don’t pay income tax when you withdraw funds in retirement.

Unfortunately, not everyone meets IRS standards to contribute to a Roth IRA. The primary reason individuals aren’t allowed to contribute is that their income exceeds the Roth IRA income limits. That’s when it makes sense to look into a Roth IRA conversion, or a “backdoor Roth IRA.”

No Income Cap to Convert Traditional IRA to Roth IRA

In the past to be able to convert from a Traditional to a Roth IRA your income needed to be under $100,000. The IRS rules have changed and there is no longer an income cap in place.

With the cap removed, high-income earners can now convert as long as they pay the appropriate tax on the conversion. There is no 10% early withdrawal penalty if the funds move from a Traditional IRA to a Roth IRA in a 60-day window.

Roth IRA Conversion Taxes

When you convert from a Traditional IRA to a Roth IRA, a process also known as creating a “backdoor” Roth IRA, you generally pay income tax on the contributions. The taxable amount that is converted is added to your income taxes and your regular income rate is applied to your total income. If the amount is large enough, it may raise your tax bracket for the year in which you do the conversion.

Note that if the money in your Traditional IRA is post-tax money (you did not take a deduction on the money you contributed), you may not owe tax when you convert to a Roth IRA. Discuss this carefully with a financial advisor.

Why Convert to Roth IRA?

Tax-savvy investors want to pay as little income tax as possible. Converting to a Roth IRA allows you to make smart tax moves that will save money in the long run.

If you anticipate your income dropping significantly in a certain year (and increasing in following years), you could plan a conversion for the low-income year. Since your income is lower, you may be in a lower tax bracket when you convert.

Similarly, if the government announced tax-rate increases to go into effect in the following year, a conversion in the current year would save income tax.

Converting to a Roth IRA will guarantee that you will owe no additional income tax on the converted funds—and any money those funds will earn before you withdraw them—during retirement. The balance in your portfolio will be what you can tap in retirement, and you won’t have to calculate an after-tax balance.

Convert to Roth IRA, Not Eligible

Even though high-income earners can convert to a Roth IRA, they may not be able to contribute additional funds. Roth IRA eligibility rules will still be in place for any future contributions. Converting an IRA to a Roth IRA can be done easily through your brokerage account.

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