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Rules to Convert Traditional IRA to Roth IRA

When you started saving for retirement, your search for the best retirement account possibly led you to settle for a Traditional Individual Retirement Account. A Traditional IRA is all good because of its tax-deferred nature. This ability can lead to bigger interest earned on your money during the time it’s in the account.

convert traditional ira to roth ira

A Traditional account also demands that a mandatory withdrawal be made before the age of 71. These are called RMD’s – Required Minimum Distributions. If you fail withdraw the mandatory amount, the IRS will penalize you.

Thinking about these features may get you wishing that you could convert your Traditional IRA to a Roth IRA. Another reason that would call for such a conversion is an anticipated drop in income that would put you in a lower tax bracket upon conversion.

Is it, however, possible to convert Traditional IRA to Roth IRA account? Yes, of course. A rollover of an account is allowed by the IRS under their terms and conditions. You may need to discuss this with a professional financial adviser to see if you are eligible for the Roth account you wish to convert to.

The IRS gives you some rules and guidelines that must be followed in order to successfully rollover your Traditional account to a new Roth account. These rules are outlined below.

  • Payment of taxes

    If you want to rollover your Traditional account to a Roth account, you will begin by withdrawing the money that you have been contributing to it. Income tax must be paid for the amount you are rolling over.

  • 60 day rule

    Conversion of a Traditional IRA to a Roth IRA must be completed within 60 days. If your Traditional IRA proceeds are deposited into your Roth account within this time frame, you will only need to pay income tax on the rolled funds.

    If the 60-day rule is not abided by, and you are under 59½ years, the withdrawal will be treated as other early withdrawals and will be subject to a 10 percent penalty in addition to the regular income tax.

  • Alternate methods

    Another option is having your Traditional IRA trustee transfer your funds directly to the trustee of your new Roth IRA.

    If you are not changing trustees, this option will make things even easier for your conversion. All that your trustee has to do is open a new Roth account for you and then transfer your Traditional IRA funds to it.

  • Five year rule

    The normal Roth rules apply to a Roth conversion. The Roth must be in existence for five years and the IRA owner must reach to age of 59 ½. Once these rules are achieved, then the true value of a Roth IRA will be at hand. There is nothing better than tax-free!