Tax Tips on Converting a Traditional IRA to a Roth IRA - information from Brookwood Tax Service

This page last updated on
August 5, 2005

Convert Your Traditional IRA to a Roth
Tax strategy can save substantial tax over the long term

You may be eligible to convert your existing traditional IRA to a Roth IRA and realize significant tax savings by doing so. Taxpayers are eligible to make this conversion if their adjusted gross income does not exceed $100,000 for the year of the conversion and they do not file their return as “married, filing separately.”

Some of the benefits of converting your traditional IRA to a Roth IRA include:

	Qualified distributions from a Roth IRA are tax free;
	Nonqualified distributions of contributions from a Roth IRA are tax free five years after conversion;
	Roth IRA balances can accumulate tax free indefinitely; and
	Roth IRAs are not subject to the required minimum distribution rules for taxpayers who have reached age 70½.

There is a cost to converting a traditional IRA to a Roth IRA, however. The IRS requires you to include any converted amount in your taxable income for the year of the conversion, making it subject to regular income tax rates. However, all withdrawals from the converted amount will be tax-free for the taxpayer and the beneficiary or beneficiaries who might inherit the Roth IRA.

A Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE) may also be converted to a Roth IRA. There are additional restrictions on conversions from SEPs or SIMPLEs. For example, you cannot convert a SIMPLE IRA to a Roth IRA within the first two years of participation in the SIMPLE plan.

Once you make a conversion from a SEP or SIMPLE IRA, you cannot convert any future contributions to the SEP or SIMPLE to a Roth IRA.

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Convert Your Traditional IRA to a Roth Tax strategy can save substantial tax over the long term

Convert Your Traditional IRA to a Roth
Tax strategy can save substantial tax over the long term