How to Convert IRA to Roth IRA
Earn a regular income., Meet the IRS income requirements., Keep your contribution below maximum eligible contribution limits., Transfer any amount for rollovers or conversions., Read and research different companies., Select the size of the IRA that...
Step-by-Step Guide
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Step 1: Earn a regular income.
The first test of eligibility for a Roth IRA is that you must have regular earnings.
You cannot deposit gift money into a Roth IRA, except that a working spouse may contribute the Roth IRA of his or her spouse.
Minors, who are earning money from a part-time job, may also contribute to a Roth IRA in the name of a custodian. -
Step 2: Meet the IRS income requirements.
The IRS revises these requirements annually and makes changes based on inflation rates.
In order to contribute to a Roth IRA, you must earn below certain limits.In 2015, a single person earning less than $116,000 was eligible to contribute to a Roth IRA.
A married couple jointly earning less than $183,000 was eligible.
For 2016, the limits are $117,000 for a single person and $184,000 for a married couple filing jointly. , As of 2015, the limit on contributions to a Roth IRA was $5,500 per year.The limit is the same for
2016.Individuals over age 50 are allowed to contribute an additional $1,000 per year to “catch up.” Individuals with limited earnings may only contribute up to the level of their earnings, if that is less than $5,500.
For example, someone who only earned $3,000 in a given year may only contribute up to $3,000. , The contribution limits mentioned above apply only to initial contributions that go directly to the Roth IRA.
The contribution limits and income limits do not apply to conversions from another account into a Roth IRA.This is what makes converting a strong option for some people.
If you have a traditional retirement account from your employer worth, for example, $50,000, you may transfer that whole amount, or any part of it, into your Roth IRA.
The annual limit of $5,500 does not apply. , If you search online, you will be able to find articles and reports from independent financial researchers that describe and rate brokerage firms that offer Roth IRAs, among other financial products., Some Roth IRA managers require that you invest and maintain a minimum amount.
Others do not.
You will want to consider the amount of money that you wish to invest, and then look for a company with a Roth IRA that suits your needs., When you are looking for a Roth IRA, you will want to compare the costs at various brokers.
Some of the costs involved with an IRA are trading fees, set up fees, and ongoing maintenance fees.
Some IRA funds will also require you to pay commissions on the earnings you receive.
Ask about these, and any other costs, that may be associated with your new account., Some brokerage companies exist physically, with multiple locations nationwide, while some are primarily engaged in online business.
You need to consider how much you value the opportunity of dealing with a real person face-to-face, or if you are comfortable doing business online or over the phone., Under the first option for rolling funds from another type of retirement account into a Roth IRA, you can request a withdrawal directly from your traditional IRA.
Get a check made payable to yourself, and then, within 60 days, deposit the money into a Roth IRA account.
If you do not make the deposit to a Roth IRA account within 60 days, you will be required to pay taxes on the money and pay a 10% early withdrawal penalty.You are allowed to convert all or any part of your traditional retirement account into your Roth IRA, as long as you make sure to complete the transfer within the 60 day limit. , This method has the security of avoiding any possibility of being taxed on the funds that are transferred.
First, open a Roth IRA, and then direct the trustee of your traditional IRA to transfer the amount of money that you select directly into the new Roth IRA.
By keeping the money out of your hands completely, you do not risk any early withdrawal penalty., This is referred to as a “Same Trustee” transfer.
If you have been satisfied with the organization managing your traditional IRA, you may wish to open your Roth IRA with the same company.
Then just have the trustee transfer money from one account to the other. , In most cases, a traditional IRA is the sort of 401(k) plan that employers set up for their employees.
Money from your paycheck is automatically deducted and transferred to your IRA as pre-tax income.
That means that at the time you earned it, you did not pay income tax on it.
Now, when you are transferring to a Roth IRA, you will need to report that money when you complete your annual tax return, and you will pay income tax on it at your present tax rate.If your employer does not establish a 401(k) plan for employees, you may also create your own tax-deductible IRA and make pre-tax contributions to it.
For this to apply, you must be younger than 70 1/2 years old and have an adjusted gross income of less than $184,000 for a married couple.
To report transferred money from a tax-deductible IRA as income, whether established by yourself or by an employer, first enter the full amount of the conversion on Form 1040, Line 15a, or Form 1040A, Line 11a.
You are not eligible to use Form 1040-EZ if you are making this conversion.
Use IRS form 8606 to calculate the taxable portion of your conversion.
This form helps you determine whether your converted funds include any previously tax-deductible income.
Report the taxable part of your conversion on Form 1040, Line 15b, or Form 1040A, Line 11b. , If you are converting money from a source other than a tax deductible IRA, then the full amount of the conversion will be taxable, and you will report it differently on your tax return.Report the total amount of the conversion on Form 1040, Line 16a, or Form 1040A, Line 12a.
If any portion of the money in this account was taxed previously, then subtract that amount from the total.
The remainder is what you will need to report for taxes now. (For most non-IRA accounts, the initial contributions were probably tax-deductible, so you probably have nothing to subtract.
The full conversion, for most people, will be reported as taxable now.) Report the difference as taxable income on Form 1040, Line 16b, or Form 1040A, Line 12b. -
Step 3: Keep your contribution below maximum eligible contribution limits.
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Step 4: Transfer any amount for rollovers or conversions.
-
Step 5: Read and research different companies.
-
Step 6: Select the size of the IRA that you need.
-
Step 7: Investigate the costs of each IRA plan you research.
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Step 8: Decide the value of convenience.
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Step 9: Rollover the money by yourself within 60 days.
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Step 10: Make a Trustee-to-Trustee fund transfer.
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Step 11: Open a Roth account with the same organization.
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Step 12: Pay the income taxes at the time of the transfer for funds converted from "deductible" IRAs.
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Step 13: Pay the income taxes at the time of the transfer for funds converted from non-tax deductible sources.
Detailed Guide
The first test of eligibility for a Roth IRA is that you must have regular earnings.
You cannot deposit gift money into a Roth IRA, except that a working spouse may contribute the Roth IRA of his or her spouse.
Minors, who are earning money from a part-time job, may also contribute to a Roth IRA in the name of a custodian.
The IRS revises these requirements annually and makes changes based on inflation rates.
In order to contribute to a Roth IRA, you must earn below certain limits.In 2015, a single person earning less than $116,000 was eligible to contribute to a Roth IRA.
A married couple jointly earning less than $183,000 was eligible.
For 2016, the limits are $117,000 for a single person and $184,000 for a married couple filing jointly. , As of 2015, the limit on contributions to a Roth IRA was $5,500 per year.The limit is the same for
2016.Individuals over age 50 are allowed to contribute an additional $1,000 per year to “catch up.” Individuals with limited earnings may only contribute up to the level of their earnings, if that is less than $5,500.
For example, someone who only earned $3,000 in a given year may only contribute up to $3,000. , The contribution limits mentioned above apply only to initial contributions that go directly to the Roth IRA.
The contribution limits and income limits do not apply to conversions from another account into a Roth IRA.This is what makes converting a strong option for some people.
If you have a traditional retirement account from your employer worth, for example, $50,000, you may transfer that whole amount, or any part of it, into your Roth IRA.
The annual limit of $5,500 does not apply. , If you search online, you will be able to find articles and reports from independent financial researchers that describe and rate brokerage firms that offer Roth IRAs, among other financial products., Some Roth IRA managers require that you invest and maintain a minimum amount.
Others do not.
You will want to consider the amount of money that you wish to invest, and then look for a company with a Roth IRA that suits your needs., When you are looking for a Roth IRA, you will want to compare the costs at various brokers.
Some of the costs involved with an IRA are trading fees, set up fees, and ongoing maintenance fees.
Some IRA funds will also require you to pay commissions on the earnings you receive.
Ask about these, and any other costs, that may be associated with your new account., Some brokerage companies exist physically, with multiple locations nationwide, while some are primarily engaged in online business.
You need to consider how much you value the opportunity of dealing with a real person face-to-face, or if you are comfortable doing business online or over the phone., Under the first option for rolling funds from another type of retirement account into a Roth IRA, you can request a withdrawal directly from your traditional IRA.
Get a check made payable to yourself, and then, within 60 days, deposit the money into a Roth IRA account.
If you do not make the deposit to a Roth IRA account within 60 days, you will be required to pay taxes on the money and pay a 10% early withdrawal penalty.You are allowed to convert all or any part of your traditional retirement account into your Roth IRA, as long as you make sure to complete the transfer within the 60 day limit. , This method has the security of avoiding any possibility of being taxed on the funds that are transferred.
First, open a Roth IRA, and then direct the trustee of your traditional IRA to transfer the amount of money that you select directly into the new Roth IRA.
By keeping the money out of your hands completely, you do not risk any early withdrawal penalty., This is referred to as a “Same Trustee” transfer.
If you have been satisfied with the organization managing your traditional IRA, you may wish to open your Roth IRA with the same company.
Then just have the trustee transfer money from one account to the other. , In most cases, a traditional IRA is the sort of 401(k) plan that employers set up for their employees.
Money from your paycheck is automatically deducted and transferred to your IRA as pre-tax income.
That means that at the time you earned it, you did not pay income tax on it.
Now, when you are transferring to a Roth IRA, you will need to report that money when you complete your annual tax return, and you will pay income tax on it at your present tax rate.If your employer does not establish a 401(k) plan for employees, you may also create your own tax-deductible IRA and make pre-tax contributions to it.
For this to apply, you must be younger than 70 1/2 years old and have an adjusted gross income of less than $184,000 for a married couple.
To report transferred money from a tax-deductible IRA as income, whether established by yourself or by an employer, first enter the full amount of the conversion on Form 1040, Line 15a, or Form 1040A, Line 11a.
You are not eligible to use Form 1040-EZ if you are making this conversion.
Use IRS form 8606 to calculate the taxable portion of your conversion.
This form helps you determine whether your converted funds include any previously tax-deductible income.
Report the taxable part of your conversion on Form 1040, Line 15b, or Form 1040A, Line 11b. , If you are converting money from a source other than a tax deductible IRA, then the full amount of the conversion will be taxable, and you will report it differently on your tax return.Report the total amount of the conversion on Form 1040, Line 16a, or Form 1040A, Line 12a.
If any portion of the money in this account was taxed previously, then subtract that amount from the total.
The remainder is what you will need to report for taxes now. (For most non-IRA accounts, the initial contributions were probably tax-deductible, so you probably have nothing to subtract.
The full conversion, for most people, will be reported as taxable now.) Report the difference as taxable income on Form 1040, Line 16b, or Form 1040A, Line 12b.
About the Author
Zachary Perez
Professional writer focused on creating easy-to-follow organization tutorials.
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