How to Convert Your Fidelity Traditional IRA to a Roth IRA
Now that you've decided to convert your Traditional IRA to a Roth IRA, you'll need to open a new Roth IRA and then transition the funds from your existing Fidelity Traditional IRA. The good news is that most of the time you can open the account and complete the conversion steps online in less than 20 minutes.
Why would I want to convert my IRA to a Roth IRA?
For many people, the decision to convert from a Traditional IRA to a Roth IRA comes down to taxes, time, and cost.
Because you pay taxes on your conversion amount, as well as on all future contributions, up front, rather than when you withdraw the funds, you owe no taxes on future earnings as long as you have met the five-year aging requirement and are over 59½ or disabled when you begin taking withdrawals. Taxes on Roth contributions are based on your current income level, so if you think you'll be in a higher tax bracket in the future, it might be smart to pay the taxes now. Visit our Tax Topics page, Roth IRA Conversions and Taxes to learn more about the tax benefits and implications.
The financial benefits of conversion typically increase the longer your money remains in the Roth IRA and because there are no required minimum distributions with a Roth IRA, your money can mature longer. There is a five-year aging requirement on Roth accounts, so if you plan on withdrawing the money before that period, you will be subject to a 10% penalty. Because you're moving untaxed assets into an account where assets are taxed prior to contribution, you will owe taxes on the IRA assets you convert. There is no penalty for converting from one account to another, but how you pay the taxes could affect the efficiency of the conversion. So you'll need to consider whether you can afford to pay those taxes this year.
If you'd like more specific information about how a Roth IRA could benefit your overall investment strategy, take a look at our Roth Conversion Evaluator or speak to your financial advisor.
Note: We do not suggest using retirement money to pay taxes from your Roth conversion for two reasons: it reduces how much money goes into your Roth IRA and if you're under 59½, you may have to pay a 10% penalty for taking money out to pay the taxes you owe. Instead, consider using cash or other savings held in nonretirement accounts.
What do I need to know?
The process for converting your Traditional IRA to a Roth IRA is twofold. First you will open a new Roth IRA and then you will convert assets from your existing Traditional IRA into your Roth account. You can complete the entire process online, provided you meet the following criteria:
- You currently have a Fidelity Traditional IRA (information on converting a non-Fidelity account into a Fidelity Roth account can be found on the Roth Conversion Checklist page under Converting a Traditional IRA).
- You've taken your required minimum distribution (RMD) from the IRA you're converting (if needed).
- You plan to defer the tax payment on your conversion, rather than pay now.
When you are ready to convert:
- Follow these easy steps to convert your IRA to a Roth IRALog In Required.
- Review and confirm your personal information by selecting Continue.
- Review and confirm your employment information by selecting Continue.
- In Account Settings, select your core position.
- Review and confirm all of your remaining information and then select Confirm My Information. After that, open and read the terms and conditions, check the appropriate box, and select Agree and Open Account.
You've now successfully opened your new Roth IRA. The Fund Your Account page appears and you will see a message with your new account number.
- Under How would you like to fund your account?, select Convert an existing Fidelity IRA to a Fidelity Roth IRA.
You can choose to defer the tax payment or pay now. If you elect to defer your tax payments, you will be asked if you're selecting a whole or partial conversion. After you make your selection, your assets are converted into your new Roth IRA.
Note: If you elect to pay taxes now, please call us at 800-343-3548 to complete your conversion.
If you prefer, you can download and mail in the Roth IRA Conversion form (PDF) or call us at 800-343-3548 for assistance.
What to expect
If you defer paying the conversion taxes, you will need to pay the taxes as a part of your tax obligation for that year. You will receive a 1099-R from the IRA you converted showing the distribution of funds, as well as a Form 5498 showing the contribution to the new Roth IRA.
It takes about 3 business days to process your transaction. You will receive a confirmation from Fidelity by U.S. Mail within 7–10 days.
Frequently asked questions
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 required minimum distribution (RMD) 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, RMDs 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 required minimum distribution (RMD)?
You cannot convert a required minimum distribution to a Roth IRA. Converting to a Roth IRA will not satisfy your RMD. You will need to take your RMD 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.
How to reverse a Roth IRA conversion
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.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.