Roth Conversions

Looking for tax-free retirement income? A Roth conversion strategy can be used to pay taxes now and avoid tax bills later when your income may be lower or taxes may be higher.

How does a Roth Conversion work?

1. Fund a traditional IRA. The first step is to actually have a traditional IRA to convert. It may be a traditional IRA that you’ve been funding for years. Or perhaps you are rolling an old 401(k) into a traditional IRA before converting to a Roth.
   
   
2. Open the Roth IRA. Before you can transfer your traditional IRA assets, you have to have an open Roth IRA to direct the money.
   
   
3. Pay taxes on the converted assets. Remember, ALL distributions from a traditional IRA are taxed as income - not capital gains. That includes distributions for Roth conversions.
   
   
4. Transfer the traditional IRA assets to the Roth IRA. Your financial professional or IRA custodian can help you complete the paperwork so that the assets are automatically transferred, avoiding any penalty.
   
   
5. Wait at least five years to achieve tax-free distributions. For Roth IRA distributions to be tax-free, you must be at least 59 1/2 and the account must be open at least five years. Plan ahead and make sure you wait the correct amount of time. Otherwise you’ll lose the Roth IRA tax benefits.

TIP:

If possible, pay the conversion tax with assets outside the IRA. If you use IRA funds to pay the taxes, you reduce the amount that funds the new Roth IRA. That reduces the benefit of tax-deferred growth and tax-free distributions in the future. If you use other assets to pay the taxes, you can maximize the amount going into your Roth IRA.