Roth IRA Conversion

Roth IRA Conversion

A Roth IRA is an individual retirement account in which the money contributed to the account, up to certain limits, may be invested in stocks, bonds, cash reserve accounts, etc. The most important aspect of an investment with a Roth IRA is that withdrawals are tax-free after age 59/60 yrs old.

It is a retirement account so you can only have one Roth IRA at a time, but you can have another individual account - like an Individual Brokerage Account or you can invest in mutual funds/ETFs (Exchange Traded Funds), which are similar to accounts with multiple holdings. You must also cease all contributions to the account after the year in which you reach age 70.5 yrs.

You can continue withdrawing your earnings as long as they remain in the Roth IRA, but only after the first five years have passed since opening an account will you be able to withdraw your contributions without penalties or paying taxes.

<b>How to Convert a Traditional IRA to a Roth IRA</b>

How to Convert a Traditional IRA to a Roth IRA

It is easy to transfer your existing IRA, SIMPLE or SEP accounts into a Roth IRA. You can direct the investment firm or custodian to simply change your IRA type and transfer all funds into a Roth IRA. If you like, you may do this by opening a traditional IRA first and then changing it to a Roth IRA.

If you have an existing traditional IRA, SEP, or SIMPLE plan that is currently being funded and wish to convert it to a Roth IRA, you must first actually open the Roth and fund it. Then roll over your existing IRA or SEP/SIMPLE plan into the Roth IRA. If you have any questions about this process, please consult with an investment professional before initiating the conversion.

IRA Roth Conversion Rules

  • You must be under age 70.5.
  • You cannot contribute to a Roth IRA for the year an IRS Form 1099-R reports that you first participated in the plan.
  • You must not have had a Roth IRA for at least 5 years. If you convert part or all of your traditional IRA, SEP, or SIMPLE plan to a Roth IRA, these years will not be counted as satisfying this rule.
  • You must have been eligible to contribute to a traditional IRA or SEP plan for the entire year you made the conversion.
  • You cannot convert from your employer's retirement plan to a Roth IRA if you participated in the plan at any time during that year.
  • You cannot convert a deductible traditional IRA to a Roth IRA.
  • Amounts converted are taxed because you already took the tax deduction for the amount you contributed to your traditional IRA, SEP, or SIMPLE plan.
  • Conversions are not included in income for IRA contribution purposes.
  • If you later recharacterize the contribution, do not include the amount you converted in income.
  • If you made a Roth IRA Conversion and want to recontribute the amount, there is no time limit for making such a contribution, but contributions must be made with after-tax income.
  • You can withdraw any amount converted after the second year is over, but you will have to pay income tax on the earnings unless you wait until 5 years after a conversion in which case all withdrawn amounts are considered to come from contributions.


A Step-by-Step Process of Converting to a Roth IRA Account


Step1: Open a Traditional IRA Account

Open a traditional IRA account. If you do not have one, open one from any broker/bank/financial institution. Many online brokerages now offer IRA accounts.

Step 2: Withdraw From Traditional IRA Account

You can do it in several ways, such as transferring money to your personal bank account or any other way you are familiar with.

Step 3: Open a Roth IRA Account

Open a Roth IRA account with the same financial institution where you opened your traditional IRA. If you do not have an existing Roth IRA account, or if your brokerage only allows you to open one Roth account (or you prefer not to link your traditional IRA with your Roth), you may open a regular, non-IRA account at the financial institution where you opened your traditional IRA, and then open a Roth IRA with another brokerage. If your IRA assets are over $200,000 and you already have a Roth IRA account in the same institution or with the same broker/dealer, when you convert you will need to use the IRA to Roth conversion option, so you will need to open a non-IRA account at the same institution where your traditional IRA is held.

Step 4: Transfer Traditional IRA Assets to Roth Account

Transfer your traditional IRA assets from your account with the financial institution where you opened your traditional IRA account to your new Roth IRA account.

Step 5: Withdraw Converted Amounts From New Roth Account

If you convert your entire traditional IRA account to Roth, you can withdraw all converted amounts once your withdrawal request has been processed. If you wish to keep some of the traditional IRA assets, you can use the assets to reinvest immediately. If you want to hold on to some of the converted assets, you should transfer those assets directly to your Roth account, and do not make withdrawals from the traditional IRA.

Step 6: Keep in Mind...

You can convert part or all of your traditional IRA to a Roth IRA any time as long as you meet the eligibility criteria and follow the steps.

Remember, within 5 years of conversion, any amount you withdraw from a Roth IRA is considered to be contributions and not subject to tax.


Mutual funds and Exchange-traded funds (ETFs) are sold by prospectus. Please consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus provides a balanced analysis of the investment risks and benefits. Read it carefully before you invest.

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