A Roth IRA conversion lets you move all or part of an eligible retirement account into a Roth IRA. The taxable portion generally counts as income for that year. Documented after-tax contributions aren’t taxed again, but IRA pro-rata rules may affect how much is taxable. Qualified withdrawals may be tax-free.¹

Should I Convert to a Roth IRA?

Converting to a Roth IRA isn’t for everyone. It usually depends on your current income tax bracket and the bracket you expect to be in when you retire. You’ll need to pay taxes up front on the funds you plan to convert to a Roth IRA. Are you prepared to pay those taxes with resources outside of your retirement funds? These are just a few of the considerations you should have in mind before converting to a Roth IRA.

Converting your retirement savings account to a Roth IRA  may be advantageous  if you:

• Expect to be in a higher tax bracket during retirement
• Plan to keep the money invested in the Roth IRA for at least five years
• Can pay the conversion taxes from assets other than those being converted

Roth IRA withdrawal rules include separate five-year requirements. Earnings generally can be withdrawn tax-free only after a five-year holding period and once you reach age 59 1/2 or meet another qualifying condition. Each conversion also has its own five-year period, and withdrawing converted funds before that period ends and before age 59 1/2 may trigger an additional 10% tax.

Roth IRA ordering rules generally treat regular contributions as withdrawn first, followed by converted amounts and then earnings.² Be sure you won't need the converted funds in the near term before making a conversion.

Unlike traditional IRAs, Roth IRAs have no required minimum distributions (RMD) at age 73.³  In general, for years after 2023, the original owner of a designated Roth account in a workplace plan has no lifetime RMDs.

Converting to a Roth IRA  may not be advantageous  if you:

• Expect to be in a lower tax bracket during retirement
• Expect to need the assets in the next five years

If you choose to keep your funds in a traditional retirement plan, you must begin to take RMDs in the year you reach age 73³ (if you were born between 1951 and 1959), or age 75 (if you were born in 1960 or later ). Otherwise, you could be subject to a 25% penalty tax, which may be reduced to 10% if you correct the missed RMD in a timely manner. If you’re in a lower tax bracket in retirement, you’ll be able to make withdrawals from a traditional retirement plan at a lower tax rate.

Why Should I Pay the Resulting Conversion Taxes From Non-Retirement Assets?

When you convert your traditional retirement assets from another IRA to a Roth, you will have to pay taxes up front on any earnings and pretax contributions. If you tap your traditional retirement assets to pay the conversion tax, you miss out on the growth potential that money could have had, specifically growing tax-free as a Roth asset.

Should Retirees Convert to a Roth IRA?

Retirees who expect to need funds within five years may want to think carefully before converting to a Roth IRA. While regular Roth IRA contributions can generally be withdrawn tax- and penalty-free at any time, converted taxable amounts and earnings are subject to different five-year and age-based rules. If you don’t expect to need the converted funds during the applicable holding period, or you’re converting to leave the funds to your heirs, a conversion may make sense for you.

Planning to pass your Roth IRA on to loved ones? Remember that inherited Roth IRAs are subject to distribution rules, and many non-spouse beneficiaries must withdraw the assets within 10 years.

If your tax status is changing for some reason and you know you will be taxed at a higher rate in the future, you may consider converting some assets to a Roth so you can diversify how your retirement assets are taxed and gain more flexibility in managing taxable income in retirement.

What Types of Retirement Accounts Can Be Converted to a Roth IRA?

Several types of retirement plan and IRA assets may be eligible for conversion to a Roth IRA. Workplace plan assets generally must be eligible for rollover, and a distributable event may be required under the terms of the plan. Eligibility rules vary by plan type and may include:

• Eligible assets from 401(k), 403(b), and 457(b) plans
• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs after the account has been held for at least two years

Do I Have To Convert 100% of My Account Assets to a Roth IRA?

No, you can choose to convert only a portion of your retirement account assets. If you're worried that converting all of your assets in a given year will put you into a higher federal income tax bracket, you should work with your tax advisor to figure out how much you can afford to convert without subjecting those assets to higher taxes. Converting too much could outweigh the potential benefits if you were to end up with a hefty tax bill.

Keep in mind that a Roth IRA conversion may affect your Medicare costs. The conversion increases your reported income for the year and could lead to income-related adjustments to your Medicare Part B and Part D premiums in a later year.

Taxes When Converting to a Roth IRA

The taxable portion of the amount you convert to a Roth IRA generally will be included in your income for the year of the conversion. Documented after-tax contributions generally are not taxed again, although pro-rata rules may apply. Any amount withheld for taxes is not converted to the Roth IRA. If you are younger than 59½, that amount may also be subject to a 10% additional tax unless an exception applies.

If your IRA savings are composed entirely of nondeductible IRAs, you can convert them to a Roth IRA relatively simply. You won't have to pay tax on your contributions (which have already been taxed), but you will owe tax on the account's earnings. (This would also apply to other retirement accounts that allow non-deductible contributions.)

If you have both deductible and non-deductible savings in your IRA, making a conversion is more complicated, as the taxable portion is included in income and documented after-tax basis is not taxed again, subject to pro-rata rules. You'll need to report your “basis,” if any. (Generally, this relates to nondeductible or after-tax contributions previously made in your traditional IRA and reporting of your taxable conversion income to the IRS.)

You must prorate the amount of money you convert based on the proportion of nondeductible versus deductible funds in your total IRA. The prorated formula is as follows:

• Total After-Tax Money in All IRAs ÷ Total Value of All IRAs × Amount Converted

Roth Conversion Limits

There are no conversion limits when converting from a traditional retirement account to a Roth IRA or from one type of IRA to a Roth IRA. You can contribute any amount of funds and make any number of transactions at any time.

Roth Conversion Deadline

The annual deadline for a Roth conversion is Dec. 31.

What Happens If I Change My Mind After Conversion?

Roth IRA conversions generally cannot be reversed. Since Jan. 1, 2018, the IRS has not allowed investors to undo a Roth conversion. However, eligible IRA contributions may still be recharacterized between traditional and Roth IRAs.

Can I Make Annual Contributions to the Converted Roth IRA?

You must be eligible to make Roth IRA contributions based on your IRS Modified Adjusted Gross Income (MAGI) and tax-filing status. See Which IRA Is Right for Me? for more information.

How Do I Transfer a Traditional IRA to a Roth IRA?

Before making the decision to convert retirement assets to a Roth IRA you should consult with a qualified tax advisor.

Need Help With a Roth IRA Conversion?

To start the Roth IRA conversion process, contact MissionSquare at (800) 669-7400.

[b3-regular] 1 Qualified distributions are federal income-tax free, have a five-year holding requirement, and may be withdrawn upon attaining age 59 1/2, disability, first-time home buyer expenses, or death of account owner. Nonqualified distributions are subject to federal income tax, which may apply to the earnings portion of IRA assets. Also note that a penalty may apply to non-457(b), 401(a), 401(k), or 403(b) plan assets rolled into the account and then withdrawn prior to age 59 1/2. [/b3-regular]

[b3-regular] 2 Contributions: If you contribute to a Roth IRA, you can make tax-free withdrawals if you’ve owned a Roth IRA for at least five years (as defined by the IRS) and meet the requirements for a “qualifying event”: age 59 1/2, a “first-time” home purchase, a disability, or death (with withdrawals going to your beneficiaries). Otherwise, you may have to pay income taxes and penalties to withdraw your earnings. Withdrawals: Roth IRA contributions can be withdrawn at any time without taxes or penalties. If you have a traditional IRA, you may not be able to withdraw your money before age 59 1/2 without paying a penalty. There can be many exceptions to the IRS rules, so carefully research all of your options. [/b3-regular]

[b3-regular] 3 Age 70 1/2 if you were born before July 1, 1949; age 72 if you were born after June 30, 1949, and before Jan. 1, 1951; age 73 if you were born from 1951 through 1959; or age 75 if you were born in 1960 or later. [/b3-regular]

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