What is a Roth IRA conversion?

A Roth IRA conversion is the process of moving funds from a traditional IRA, 401(k), or other pre-tax retirement account into a Roth IRA. The converted amount, if it was pre-tax, becomes taxable income in the year of conversion, but future qualified withdrawals from the Roth IRA are entirely tax-free.

When does a Roth IRA conversion make sense?

A Roth IRA conversion makes sense if you expect to be in a higher tax bracket in retirement than you are today. It's also beneficial for estate planning (leaving tax-free money to heirs), avoiding Required Minimum Distributions (RMDs), and for high-income earners who want to use the "backdoor Roth" strategy.

How do I convert a traditional IRA to a Roth IRA?

You typically open a Roth IRA, then contact your traditional IRA custodian to request a direct rollover or trustee-to-trustee transfer of funds into your Roth IRA. You will pay income taxes on any pre-tax amounts converted in the year of the conversion.

What is the 5-year rule for Roth conversions?

There are two 5-year rules. For converted amounts, each conversion has its own 5-year period. If you withdraw converted principal before this period is up, it's tax-free. However, if you withdraw earnings on converted amounts before the 5-year period (and before age 59½), they are subject to income tax and a 10% penalty. The general Roth IRA 5-year rule for qualified withdrawals starts with your first Roth contribution.

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

Yes, you can convert funds from a 401(k) to a Roth IRA. If you are no longer employed by the company, you can typically roll your 401(k) into a traditional IRA first, and then convert that traditional IRA to a Roth. Some employer plans may allow a direct "in-plan Roth conversion."

What is the pro-rata rule for Roth conversions?

The pro-rata rule applies if you have both pre-tax and after-tax money across all your traditional IRAs. If you convert, the IRS treats a proportional amount of the conversion as taxable, based on the ratio of pre-tax to after-tax money in your total IRA balances. This is a key consideration for the "backdoor Roth" strategy.

What are the main downsides of a Roth IRA conversion?

The main downsides are the immediate tax liability on the converted amount, which can be substantial, and the potential for a conversion to push you into a higher tax bracket for that year. It also requires having cash outside your retirement accounts to pay the taxes.

Roth IRA Conversion Guide: When & How to Convert | One…