Roth IRA Conversion: Understanding Tax Implications & Benefits

With an IRA conversion to Roth IRA, you can help protect yourself from future tax increases. Here are a few details to consider about converting a traditional IRA to a Roth IRA.

Paying Taxes

Since you are converting to a pretax retirement account to an after-tax retirement account, you will have to pay the government the taxes that you owe them on the money from your traditional IRA. Typically, you will have to count the entire amount that you are rolling over as taxable income for the year. This means that you will have to pay taxes on the entire amount in one year. However, in 2010, the IRS is allowing investors to spread the tax bill out over two years. This makes converting to a Roth IRA much less painful financially for most people. Once you have pay taxes on the money, you will not have to worry about paying any tax on the money in your Roth IRA again. Although you do have the option to split the tax payment over two years, you do not necessarily have to do so.

Other Considerations

You will need to open a Roth IRA and then contact your old IRA provider and let them know that you want to transfer to a Roth IRA. You will need to do some paperwork and go over the process with your financial advisor first.