You can transfer all or part of the funds from a traditional IRA into a Roth IRA. Even if your income exceeds the limits for making contributions to a Roth IRA, you can still make a conversion to a Roth, sometimes referred to as a “clandestine” Roth IRA. Additionally, Roth IRAs do not require minimum distributions over the life of the original owner, and Roth IRA assets can be passed to their heirs tax-free. The amount you convert into a Roth IRA is not subject to the 10% penalty that applies to withdrawals from a traditional IRA made before you reach 59½ years of age. If you are considering reinvesting in a Roth individual retirement account (IRA), it is important to understand the potential benefits and how to take advantage of them if you have assets in a traditional IRA.
There are several reasons why dividing your savings between a Roth IRA and a traditional IRA or between a Roth IRA and a traditional 401(k) may be the best solution for you. To help you with this process, here is a checklist of steps to follow when converting your traditional IRA or old 401(k) into a Roth IRA.
Roth Conversion Checklist
- Understand the differences between Roth and traditional IRAs. Use the “Compare Roth and Traditional IRAs” section for an overview of eligibility and functions.
- Determine your eligibility for converting your traditional IRA or old 401(k) into a Roth IRA.
- Calculate the taxes that will be due on the conversion.
- Make sure you have enough funds available outside of your retirement accounts to pay the taxes due on the conversion.
- Complete the conversion. The conversion is considered completed at the beginning of the calendar year in which it was completed.
- Make an eligible cumulative distribution of your old 401(k) directly to a Roth IRA.