Roth Conversion: Why and How to Convert to a Roth IRA

Roth conversion

Optimizing retirement savings looks different for us all. One option is to convert to a Roth individual retirement account (IRA). What does that mean, how do you perform a Roth IRA conversion, and what are the tax implications? Let’s uncover these answers and more, so you can streamline the Roth conversion process if you choose.

Table of Contents

  1. Roth IRA conversions, explained
  2. Eligibility for a Roth IRA conversion
  3. Pros and cons of converting to a Roth IRA
  4. How to convert to a Roth IRA
  5. Wrapping up on Roth IRA conversions

Save money and build wealth by avoiding traditional IRA early withdrawal penalties

Public.com can help you save for retirement by structuring your portfolio for the long term

Build your portfolio


Roth IRA conversions, explained

A Roth IRA conversion is the act of transferring savings from one retirement account to a Roth IRA. You can transfer most types of distributions from an employer-sponsored 401(k), tax-deferred traditional IRA, or another account type. The Internal Revenue Service (IRS) clarifies what distributions you cannot convert to a Roth IRA.

People often choose to convert to a Roth IRA to reduce their long-term tax liability. This is because Roth IRAs hold after-tax dollars, so you can potentially save with tax-free withdrawals and make the most of capital gains.

Public.com understands needing to lock in savings for the long haul, which is why we offer a Long-Term Portfolio and give you an overview of why you invested in these assets in the first place.

Eligibility for a Roth IRA conversion

Roth IRA conversions do not have any restrictions on income or tax filing status, but there are ordinary income limits and Roth IRA contribution limits. The IRS clarifies that you must complete the rollover by the 60th day after the day you receive the distribution from your previous retirement account.

Pros and cons of converting to a Roth IRA

Pros

Since Roth IRA contributions are after-tax dollars, you can pay your tax rate now and contribute while you’re in a lower tax bracket than you plan to be in when you retire. Not only are you avoiding taxes while in a higher tax bracket, you’re also avoiding capital gains taxes (tax-free growth can be great for wealth generation).

Roth IRAs have no required minimum distributions (RMDs) while the account holder is alive. This gives you more flexibility on how you manage your retirement funds. It’s also good for estate planning because beneficiaries have 10 years after the owner’s death to distribute all assets.

Cons

Roth IRAs are irreversible and can only be converted to other Roth IRAs later on. People who are close to retirement age may want to avoid a Roth IRA conversion (the five-year rule states you must wait five years before withdrawing from your Roth account to avoid a 10-percent tax penalty). Roth IRA contributions do not allow for tax deduction.

How to convert to a Roth IRA

There are three ways to convert to a Roth IRA:

  • Rollover within 60 days of receiving the distribution to avoid a tax penalty (you will need to pay federal income taxes in the tax year you convert so your contributions consist of after-tax dollars)
  • Trustee-to-trustee transfer, where a financial institution transfers the amount directly to a Roth IRA of a different financial institution (or gives you a check to do so)
  • Same trustee transfer, where you stay within the same brokerage but switch account types

Heads up

  • Public offers Instant Transfers, an easy way to immediately deposit & withdraw funds within your investing account and take quick action as needed.


Wrapping up on Roth IRA conversions

Whether or not you choose to do a Roth conversion, educating yourself on retirement asset options is key. What now? Pick your path, execute it, and find a way to optimize your savings for retirement.

Want to learn more about investing and build your retirement plan? Public’s community-driven investment platform connects you with other investors building wealth, so you can maximize your know-how.

Save money and build wealth by avoiding traditional IRA early withdrawal penalties

Public.com can help you save for retirement by structuring your portfolio for the long term

Build your portfolio

Frequently asked questions

How much taxes do I pay on a Roth IRA conversion and can I avoid a high tax bill?

If you’re transferring from an account with pre-tax dollars, you pay income taxes based on your taxable income when the conversion occurs. To limit paying taxes on it all at once, you can do a systematic Roth conversion plan, or convert over a period of years.

What is the five-year rule for Roth conversions?

In Roth accounts, qualified distributions are eligible for tax-free withdrawals. You must hold the Roth account for at least five years before withdrawing to get qualified distributions.

What type of retirement accounts can I convert to a Roth?

You can convert any type of retirement account to a Roth IRA account except certain types of plan distributions that the IRS specifies.

When am I eligible for tax-free distributions in a Roth IRA?

Roth account holders ages 59 ½ or older who have held their account for at least five years are generally eligible for tax-free withdrawals on qualified distributions. Speak with a tax advisor or financial planner to get clear on your eligibility.

Tweet Tweet