It's generally a good idea for most investors to consider including a Roth IRA in their overall retirement planning. Roth IRAs have the potential to grow tax-free, which may help you save more over time. Plus, withdrawals aren't mandatory during the lifetime of the original owner, and Roth IRA assets may pass to your heirs tax-free.
Determining if a Roth is right for you
Anyone can convert their eligible IRA assets to a Roth IRA regardless of income or marital status. Prior to 2010, only those account owners who had a modified adjusted gross income below $100,000 were eligible to convert.
Despite its advantages, Roth may not be the preferred option for all investors. There are three important factors—taxes, time, and costs—that you should consider before you decide if conversion is right for you. Fidelity's Roth Conversion FAQs can help you weigh these factors and get answers to important questions you may have. Be sure to consult with your tax advisor with regard to your personal circumstances.
To learn more about the differences between Roth and Traditional IRAs and get a quick overview of eligibility and features, use the Roth or Traditional IRA Contribution Evaluator.
It's also important to note that if you are required to take a minimum required distribution (MRD) in the year you convert to a Roth IRA, you must do so before converting.
Considerations for owners of Roth IRAs
Generally, converted assets in the Roth IRA must remain there for at least five years to avoid penalties and taxes. Distributions from a Roth IRA are tax-free and penalty-free provided that the five-year aging requirement has been satisfied and at least one of the following conditions has been met:
- You reach age 59½
- You pass away
- You become disabled
- You make a qualified first-time home purchase
MRDs are not required during the lifetime of the original owner of a Roth IRA. MRD amounts are not eligible to be converted to a Roth IRA.
Rolling a 401(k) directly into a Roth IRA
If you qualify, you can do an eligible rollover distribution from your old 401(k) directly to a Roth IRA. You'll owe taxes on the amount of pretax assets you roll over.
Note also, if you have assets in a Designated Roth Account (i.e., Roth 401(k)) and would like to roll these to an IRA, the assets must be rolled into a Roth IRA.
As with Traditional IRA conversions to Roth IRAs, if you are required to take an MRD in the year you roll over into an IRA, you must take it before rolling over your assets.
Converting back to a Traditional IRA
Should you wish to convert your Roth IRA back to a Traditional IRA, the process is known as recharacterization. The deadline to recharacterize Roth IRA conversion contributions to a Traditional IRA is generally October 15 if you file your federal income tax return (or file for an extension) on time.
If you have recently recharacterized your account, those assets cannot be reconverted back to a Roth IRA before the later of:
- The beginning of the calendar year following the calendar year of conversion.
- The end of the 30-day period beginning on the day of the recharacterization.
Consult your tax advisor to determine your eligibility to complete a recharacterization or a reconversion.