IRA FAQs: Roth IRAs

Questions?

  • Should I own a Roth IRA?

    Generally speaking, most investors should consider having a Roth IRA as part of their overall retirement plan because it offers federal tax-free growth potential and withdrawals, which have the potential to help minimize taxes and maximize retirement savings. Contributing to a Roth IRA involves income requirements: for more information, see this chart.

  • How is a Roth IRA different from a traditional IRA?

    With a Roth IRA, you contribute money that's already been 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 5-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 distributions (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 Withdrawals of pre-tax monies are subject to ordinary income tax when withdrawn.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.

    Note that with a Roth IRA, you're able to withdraw contributions you've made at any time, for any reason, with no taxes or penalty.

  • Should I consider converting to a Roth IRA?

    For many individuals, converting to a Roth IRA may make sense. However, you should consult with a tax advisor and consider the following 4 factors prior to making your decision:

    1. Taxes: With a conversion, you pay federal income taxes now on the conversion amount, but none on any future earnings as long as when withdrawals are taken, the 5-year aging period has been met and you are age 59½ or over, disabled, or deceased. (In the event of the account holder's death, a spouse or beneficiary could make withdrawals.)

      If you think your tax rate will be higher in retirement than it is today, you may want to consider a Roth IRA conversion. If your taxable income is lower this year than in a typical year, or if you have accounts that have lost value, you may want to consider a Roth IRA conversion because you may pay less in taxes. If you plan to leave your assets to your beneficiaries, consider conversion because they may not have to pay federal taxes on that money.
    2. Time: The relative benefits of conversion will generally increase the longer your money remains in the Roth IRA. Generally, conversion may not make sense if your time horizon is less than 5 years, because if you have not met the 5-year aging requirement, any withdrawals are subject to a 10% penalty.
    3. Cost: Because you will be required to pay federal income taxes on the conversion now, you need to consider that cost and whether or not you can afford that in the current year.
    4. RMDs: There are no required minimum distributions (RMDs) from a Roth IRA during the lifetime of the original owner. If you think your tax rate will be the same or higher than your current rate when you withdraw your money, it may make sense to consider converting to a Roth IRA now.
  • What if I am over 70½ and need to take a required minimum distribution (RMD)?

    There are no RMDs for a Roth IRA.

  • 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 amounts from your Retirement Accounts 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.

  • What can I convert or roll over to a Roth IRA?

    You may be able to convert the following account types to a Roth IRA:

    • Traditional IRA
    • Rollover IRA
    • SEP IRA
    • SIMPLE IRA
    • SARSEP IRA
    • Old 401(k)
    • Old 403(b)
    • Old governmental 457(b)
  • 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?

    Anyone can convert their eligible IRA assets to a Roth IRA, regardless of income or marital status.

  • 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.
  • After I convert my IRA to a Roth IRA, can I convert it back?

    The Tax Cuts and Jobs Act eliminated the ability to recharacterize (revert) conversions beginning with taxable year 2018.

    You should consult a tax advisor to more fully understand the regulations surrounding recharacterization and conversions.

  • 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:

  • 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 2 years of starting your contributions). Rollover IRAs containing assets from an employer-sponsored plan account are also eligible to be converted. In addition, balances from employer-sponsored 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.