However, there is no limit to how much you can convert from tax-deferred savings to your Roth IRA in a single year. You can convert all of your tax-deferred savings at once if you want. However, this is not always advisable, as converting a large sum could put you in a higher tax bracket. There is no age limit or income requirement to convert a traditional IRA to a Roth. You’ll have to pay tax on the converted amount, although part of the conversion is tax-free if you’ve made non-deductible contributions to your traditional IRA.
Once the money is in Roth, you can make tax-free withdrawals (you may have to pay tax on any income withdrawn within five years of conversion, but only after you’ve withdrawn contributions and converted amounts). For more information, see Tax Rules for Roth Withdrawals. A Roth IRA is a powerful retirement savings tool because your money grows tax-free and it could make sense for you to convert your money into one. In addition, people whose income exceeds a certain amount may not be eligible to make a full (or any) contribution to a Roth.
It states that you must leave all converted funds in your Roth account for at least five years before you can withdraw them. If you have money in a traditional account but like the idea of making future withdrawals tax-free, you can do so by switching to a Roth. Roth IRAs don’t require withdrawals above a certain age, so your money can continue to grow there until you’re ready to withdraw it. So if you’re lucky enough not to have to withdraw money from your Roth IRA, you can simply let it continue to grow and let your heirs withdraw tax-free one day.
There is also a five-year rule that states that you must wait five years after the changeover to take full advantage of the Roth IRA’s tax-free distributions. When you convert traditional retirement account balances into Roth assets, you must pay normal income tax at the time of conversion. Instead of making a big adjustment, consider transferring some of the money from a traditional IRA to a Roth each year, keeping a close eye on your tax bracket cap and income limits for the Medicare high-income supplement and Social Security taxes. By converting these assets into a Roth IRA, you can benefit from tax-free withdrawals when you retire.
While you can’t contribute to a Roth IRA if your income exceeds the limits set by the IRS, you can convert a traditional IRA to a Roth IRA, a process sometimes referred to as a backdoor Roth IRA. Switching a traditional IRA or fund from a SEP IRA or SIMPLE plan to a Roth IRA can be a good choice if you expect to be in a higher tax bracket in your retirement years. To help you figure out whether this is a good investment for your situation, CNBC Make It spoke with Fred Egler, a certified financial planner at Betterment, about the difference between the two types of IRAs, the pros and cons of a Roth conversion, and exactly how to carry out a Roth conversion. You can convert as much as you want from a traditional IRA to a Roth IRA, although it’s sometimes wise to spread out these transfers for tax purposes.
Currently, there are essentially no limits on the number and size of Roth conversions you can make with a traditional IRA.
