Roth IRA Conversion Tax Implications: What You Need to Know

If you are going to go through an IRA conversion to a Roth IRA, there are a number of things that you are going to need to think about, including what this will mean for your taxes. Here are a few things to consider about the tax implications of a conversion to a Roth IRA. 

Tax Implications

When you contribute to a traditional IRA, you are doing so on a pretax basis. This means that you do not have to pay any taxes on the amount of money that you put into the account. With this type of IRA, you are not going to pay taxes until you start withdrawing money from your account when you reach retirement age. With a Roth IRA, you are going to fund the account with after-tax dollars. Therefore, when you convert to a Roth IRA, you are going to have to pay taxes on the amount that you convert.

Paying Taxes

When you convert to a Roth IRA, you are going to have to spend some time thinking about how you are going to pay for the taxes. If you use funds from your IRA, you are going to quickly deplete your retirement savings. Ideally, you should try to pay for the taxes out of your own pocket.