Answers to Roth conversion questions

Find out why you might want to time your conversion and how to manage taxes.

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Key takeaways

  • The amount of tax you will owe depends on whether you're converting pre-tax or after-tax money and your tax bracket.
  • There are some strategies that could help you manage the tax cost of your Roth conversion.
  • If you are over age 70½, you may need to take a required minimum distribution (RMD) in addition to your conversion.

Who wouldn't want tax-free growth potential and tax-free withdrawals in retirement? That's what a Roth IRA can offer.*

Not everyone can contribute to a Roth IRA because there is an income limit. But it’s still possible to have a Roth IRA—by converting money in a traditional IRA or other retirement savings account.

Of course, a Roth IRA conversion does have a cost. Income taxes need to be paid on the converted amount.

Here are some answers to frequently asked Roth conversion questions. Always consult a tax advisor about your specific circumstances.

Does time of year matter?

Converting earlier in the year generally gives you more time to pay taxes. Taxes aren't due until April 15 of the following year, so you may have more than 15 months to pay the taxes on your converted balances. (Note: If you pay estimated taxes, you may need to make some payments sooner.)

But there are also some advantages to converting later in the year:

  • You can start the clock on the 5-year rule. This IRS rule requires a waiting period of 5 years before withdrawing converted balances—or you’ll pay a 10% penalty. But the clock starts on January 1 of the year you do the conversion—no matter when it happened.

    (Withdrawals of earnings are subject to a different 5-year rule. It must have been 5 years since your first Roth contribution or conversion, plus you must be age 59½ or otherwise eligible to make penalty-free withdrawals.)
  • You'll have more information about your income for the year. Since the amount you convert is considered taxable income, you may want to consider converting only the amount that would bring you to the top of your current tax bracket.

A conversion must be completed by December 31 to be included in that year’s taxable income. Managing the tax impact of a Roth IRA conversion requires careful analysis. A review with a financial or tax advisor may be a good idea.

How can I manage taxes on a Roth conversion?

A common way to manage taxes on a Roth IRA conversion is to spread the conversion over a few years. This spreads the taxes too, and it may also prevent the income from the conversion from bumping you into a higher tax bracket.

Tax deductions can also help offset the tax cost of a Roth IRA conversion. For example, you may be able to take a tax deduction for donations to qualified charities. In general, by making charitable contributions, you can deduct up to 60% of your adjusted gross income (AGI). The deduction is usually limited to 30% of AGI for donations to some private foundations and some other organizations, as well as for contributions of non-cash assets. Note, however, that if your itemized deductions—which include charitable contributions—do not exceed the standard deduction, there wouldn't be any tax benefit from those charitable contributions. So be sure to consult with your tax advisor to plan your charitable strategy—there are techniques that can help ensure you enjoy the potential tax benefits of your charitable giving.

Learn more at FidelityCharitable.org.

Can I convert to a Roth IRA even if I earn too much to contribute?

If you or your spouse have high income levels and are not eligible to contribute directly to a Roth IRA, and you do not already have a traditional IRA, you may want to consider opening a traditional IRA and making a nondeductible contribution, then converting it to a Roth IRA. This strategy is sometimes called a back-door Roth contribution.

Tip: For more detail, see Converting your traditional IRA to a Roth IRA, which includes a Roth conversion tool and a checklist.

Can I convert money from a traditional 401(k) to a Roth IRA?

Yes, you can, assuming you're able to take withdrawals from your 401(k), and, of course, taxes still apply. Read the section "Converting a 401(k) to a Roth IRA" in the Viewpoints article: Do you earn too much for a Roth IRA?

How can I estimate my tax liability on an IRA conversion?

Your tax liability is based on 2 things: the taxable income generated by the conversion and your applicable tax rate.

To figure out how much of a conversion from a traditional IRA to a Roth IRA may be taxable, you'll need to know the types of contributions you made to any one of your traditional IRAs (not just the one that's being converted). There are 2 types of contributions.

Deductible contributions. These are contributions that are deducted from your taxable income for the tax year in which the contributions were made.

Nondeductible contributions. Any contribution for which you do not take a tax deduction is known as a nondeductible contribution. Such contributions create what is sometimes called "basis" in your traditional IRA.

Estimating the taxable income from a conversion is straightforward if you've never made nondeductible contributions to any traditional IRA. If that is the case, whatever amount you convert will all be taxable income.

Note that earnings are always taxable when converted, whether they come from deductible or nondeductible contributions, so for purposes of figuring out taxes on a conversion, you can think of your balances as falling into just 2 categories: (1) nondeductible contributions, and (2) everything else. According to IRS rules, you cannot cherry-pick and convert just nondeductible contributions, leaving deductible contributions and earnings in the account, in order to avoid taxes. Instead, you must figure out the proportion of your total traditional IRA balances that is composed of nondeductible contributions, then use that percentage to find out how much of your conversion will not be taxable. Note that inherited IRAs are excluded in this calculation.

Keep state taxes in mind too. A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will generally be treated as taxable income by your state as well as by the federal government.

Tip: If your spouse has IRAs with mostly nondeductible contributions and you have IRAs with mostly deductible contributions, you might consider converting your spouse's IRAs before yours to reduce the potential tax impact of conversion.

Do I still need to take a required minimum distribution (RMD) in the year I convert if I'm over 70½?

Yes—for both workplace plans and for traditional IRAs. In general, the first money withdrawn from your account each year has to satisfy your RMD and is not eligible for a rollover or conversion. Additional withdrawal amounts can be converted to a Roth IRA, which does not require RMDs. Note that while the Roth conversion does not count toward your RMD, you can use the after-tax value of your RMD funds to pay for at least part of a Roth conversion.

To learn more, read Viewpoints on Fidelity.com: Roth IRA conversion: 7 things to know

Next steps to consider

Create a source of tax-free retirement income.

See how to convert to a Roth IRA from a traditional IRA or 401(k).

Get even more answers about converting to a Roth IRA.

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