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How to Convert from a Traditional IRA to a Roth IRA

If you are saving for retirement in a traditional IRA account, you can convert some or all of that money to a Roth IRA account. Whether a Roth account is a good idea for you can depend on several factors.

Roth IRA Principles

Unlike traditional IRA accounts, there are no tax deductions for the contributions made to a Roth IRA. Instead of pre-tax deductions, earnings in a Roth IRA are typically tax-free at the time of withdrawal.

When you invest in a Roth IRA, you are essentially agreeing to pay taxes now in exchange for tax-free treatment when you withdraw the money later. The investor using a Roth IRA must delay any withdrawals until age 59 and a half at minimum to achieve that completely tax-free status. The funds must also remain invested for at least five years unless a special circumstance applies.

Without any exceptional circumstances, withdrawing money from a Roth IRA early incurs not only taxes on the earnings but also a 10% penalty.

Traditional IRA Accounts

Contributions to a traditional IRA can be tax-deductible or non-deductible. If you choose to deduct your contributions to a traditional IRA, you will receive a tax deduction for those contributions in the year you make them. Taxes are imposed on the earnings on those contributions and the initial investment when the money is eventually withdrawn.

If the account holder is employed by an employer (or spouse if you are married filing jointly) offering a retirement plan, there may be limits on the amount of tax deduction you can claim on your contributions.

You can claim a partial deduction or not claim any deduction on contributions made to a traditional IRA. Tax on earnings is deferred until they are withdrawn, and the portion that represents your non-deductible basis is returned to you tax-free.

Conversion to a Roth Account

“Converting to a Roth account” simply means you are changing the tax treatment of the money that has been placed in your retirement savings account.

Instead of the tax deferral available in a traditional IRA, Roth IRA accounts represent after-tax contributions. Therefore, converting to a Roth means you are canceling that deferral. You must pay the
Source: https://www.thebalancemoney.com/roth-ira-conversions-3193209