Rules for Rolling a Traditional IRA to a Roth IRA

by Rebecca Lake

When it comes to building your nest egg, it's important to consider every savings option. In addition to funding your retirement through an employer-sponsored plan, you may also consider investing in an IRA, or individual retirement account. A traditional IRA allows you to make tax-deductible contributions, while contributions to a Roth IRA are made with after-tax dollars. In 2010, the Internal Revenue Service developed new guidelines to allow more taxpayers to convert their traditional IRAs to Roths.

Income Restrictions

Prior to 2010, taxpayers could not convert their traditional IRA to a Roth IRA if their adjusted gross income exceed $100,000. As of 2010, the IRS lifted the income restriction, leaving anyone with a traditional IRA free to rollover their savings. This change is significant since the IRS also imposes an income limit on who can make regular contributions to a Roth IRA. By lifting the income restriction, the IRS made it possible for individuals whose income prevents them from making regular contributions to a Roth IRA to still take advantage of the future tax benefits Roths offer by converting.

Conversion Methods

A traditional IRA can be converted to a Roth by one of three methods. First, you can roll over your IRA by taking a distribution and reinvesting the funds into a Roth IRA. You must roll the funds over within 60 days of taking the distribution to avoid an early withdrawal penalty. You can also convert a traditional IRA by through a trustee-to-trustee transfer. You must simply direct the trustee of the traditional IRA to transfer some or all of your funds to the trustee of the Roth IRA. Finally, if the same trustee controls your IRAs, you can direct the trustee to redesignate some or all of the traditional IRA funds to a Roth IRA.

Tax Implications

While converting to a Roth IRA can offer future tax benefits, it has serious tax implications for the tax year in which the conversion occurs. According to IRS rules, you are required to pay regular income tax on any amount of the conversion that has not already been taxed. This means that if you convert $100,000 in traditional IRA funds and you're in the 28 percent tax bracket, you could end up owing the IRS $28,000 for the conversion. For conversions that occurred in the 2010 tax year, taxpayers could opt to split their tax liability over two years. The same option is not available for conversions occurring in the 2011 tax year, but you could still convert half your account one year and half the next year.


You may consider rolling over your traditional IRA into a Roth IRA if you plan to leave the funds to your heirs. Doing so can reduce the amount of estate tax they may have to pay and frees you from having to take required minimum distributions at age 70 1/2. Converting your IRA can potentially push you into a higher tax bracket since the conversion must be reported as income. This may potentially disqualify you for other tax benefits, such as the child tax credit or tax credits for education.

About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

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