FAQs: How to Convert Your Fidelity Traditional IRA to a Roth IRA
How is a Roth IRA different from a Traditional IRA?
With a Roth IRA, you contribute money that was already taxed (that is, “after-tax” dollars). Any earnings in a Roth IRA have the potential to grow tax-free as long as they stay in the account. Withdrawals of earnings from Roth IRAs are federal income tax-free and penalty-free if a five-year aging period has been met and the account owner is age 59½ or over, disabled, or deceased. Roth IRAs are not subject to minimum required distribution (MRD) rules during the lifetime of the original owner, so you can leave your assets in the Roth IRA where they have the potential to continue to grow.
With a Traditional IRA, contributions can be made on an after-tax basis, or a pre-tax (tax-deductible) basis if certain requirements are met. Any earnings in the Traditional IRA are tax-deferred as long as they remain in the account. Withdrawals of pre-tax monies are subject to ordinary income tax when withdrawn. Beginning the year in which you turn age 70½, MRDs are required from Traditional IRAs.
For both types of IRAs, distributions before age 59½ may be subject to both ordinary income taxes and a 10% early withdrawal penalty. For a detailed comparison, view the Traditional vs. Roth comparison table.
What if I am over 70½ and need to take a minimum required distribution (MRD)?
You cannot convert a minimum required distribution to a Roth IRA. Converting to a Roth IRA will not satisfy your MRD. You will need to take your MRD before you convert.
How much should I consider converting?
Since a Roth conversion is a taxable event (in other words, you will have to pay taxes on the amount of money you are converting), when determining how much to convert, you may want to consider how much money you have set aside in nonretirement sources to pay the resulting taxes. You may also want to consider converting to a Roth IRA over a number of years (tax periods) in amounts that will keep the income from the conversion within your current federal tax bracket, or within a federal tax bracket you are comfortable with.
How should I plan to pay for taxes resulting from converting to a Roth IRA?
To help maximize your retirement savings, it’s generally a good idea to consider not using the proceeds from the conversion to pay the resulting tax costs. Instead, you should consider using cash or other savings held in nonretirement accounts. Using retirement account funds to pay the taxes will reduce the amount you would have available to potentially grow tax-free in your new Roth IRA. Additionally, if you are under 59½, using funds from your retirement account could result in an additional 10% tax penalty, which may significantly reduce the potential benefit of conversion.
Can I roll over assets from my workplace retirement account at a former employer directly to a Roth IRA?
Yes, you can choose to convert an eligible rollover distribution from your old 401(k) directly to a Roth IRA. You will owe taxes on the amount of pretax assets you roll over. Note: If you have assets in a Designated Roth Account (i.e., Roth 401(k)) and would like to roll these to an IRA, you can only do so to a Roth IRA.
Am I eligible to convert?
The income limit(s) were removed in 2010. However, income limits on Roth IRA annual contributions will still apply. A provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows more people to convert to Roth IRAs by removing the modified adjusted gross income (MAGI) limitations on conversions from a Traditional IRA to a Roth IRA.
What are the potential tax implications of converting?
You'll owe taxes on the previously untaxed amount of your IRA that's converted. But, unlike Traditional IRA withdrawals before age 59½, there's no penalty involved.
There are a number of factors to consider to help you decide how much to convert. Consider these questions:
- Do you have the money set aside in a nonretirement account to pay the tax?
- How much can you convert without moving into a higher tax bracket?
It’s generally considered a good idea to use cash from a nonretirement savings or brokerage account to pay the taxes, instead of using the proceeds from the conversion.
- Using funds from the retirement account you are converting will reduce the amount of money you will have in your Roth IRA. Doing so could generate even more tax liability and reduce the additional advantage of potential tax-free growth on the full amount of the conversion.
- If you are under 59½, using funds from the retirement account you are converting may result in an additional 10% tax penalty that may significantly reduce the potential benefit from the conversion.
Can I change my mind?
You may have the ability to recharacterize (revert) your Roth IRA back into a Traditional IRA. Some reasons for considering a recharacterization include:
- Your Roth IRA investments decreased in value since you converted.
- Your taxable income is higher than you expected.
- The additional taxable income that is the result of converting a Traditional IRA into a Roth IRA puts you into a higher federal tax bracket.
- You won't have enough cash to cover the tax bill.
You should consult a tax advisor to more fully understand the regulations surrounding recharacterization and conversions.
Are there any limitations on going back to a Roth IRA after I recharacterize?
If you converted an amount from a Traditional IRA to a Roth IRA and subsequently recharacterized that amount back to a Traditional IRA, that amount cannot be reconverted back to a Roth IRA before either the beginning of the calendar year following the calendar year of the conversion, or the end of the 30-day period beginning on the day of the recharacterization, whichever is later. Consult your tax advisor regarding your eligibility to complete a reconversion.
How do I convert to a Roth IRA?
Deciding whether to convert to a Roth IRA is not a simple decision. Before you begin the process, there are things you can do to prepare:
- Create a retirement plan, or review the one you have.
- Consider consolidating your accounts to simplify your finances and make it easier to manage your investments.
- Determine how you plan to pay the taxes created by your conversion.
- Use the Roth Conversion Evaluator to help with your decision.
What account types can you convert?
Traditional IRAs (including Rollover IRAs), SEP IRAs, SARSEP IRAs, and SIMPLE IRAs are all eligible to be converted to a Roth IRA (SIMPLE IRA contributions cannot be converted to a Roth IRA during the first two years). Rollover IRAs containing assets from a workplace plan account are also eligible to be converted. In addition, balances from workplace savings plans (e.g., a 401(k) or 403(b) plan) that are eligible for distribution and rollover may generally be converted (for example, when you are no longer working for the company sponsoring the plan). Consult your own tax advisor.