Rules for Transferring a Traditional IRA to a Roth IRA

by Jacquelyn Jeanty

Roth IRAs -- also known as Roth individual retirement accounts -- provide certain tax provisions that allow investors to accumulate interest earnings on a tax-free basis. Traditional IRAs -- another type of retirement plan account -- include certain requirements for taxing contributions and interest earnings. Because of the tax-free provisions available through Roth IRAs, certain rules apply when converting a traditional IRA to a Roth IRA.

Individual Retirement Accounts

Individual retirement accounts (IRAs) provide a means for saving for retirement and also function as a type of investment vehicle. Traditional IRAs and Roth IRAs exist as two different types of retirement accounts, each with its own positives and negatives. Contributions made to a Roth IRA come from after-tax dollars, whereas before-tax or after-tax dollars can fund a traditional IRA account. Whether or not a person has to pay taxes upon withdrawal depends on the type of contributions made to the account. Since Roth IRAs contain after-tax dollars, a person can withdraw contributions from an account at anytime on a tax-free basis. Traditional IRAs work a little differently; especially those funded with before-tax dollars. As a result, certain tax rules apply in cases where a person transfers money from a traditional IRA to a Roth IRA.

Tax Law Changes

Roth IRA conversions involve rolling over money from another type of investment account, such as a traditional IRA or 401k. Any Roth IRA conversions done as of the time of publication have a same-year tax requirement, meaning any taxes due must be paid in the year when the conversion took place. Another tax law change concerns the limits on the amount of money a person can make in order to do a Roth IRA conversion. According to RothIRA.com, an investment resource site, anyone making above $100,000 a year cannot open up a Roth account; however, changes in tax law do allow high-income earners to convert an existing IRA account into a Roth IRA.

Tax Deductible Contributions

Anytime money transfers occur between a before-tax account IRA and an after-tax IRA account, federal tax rules apply. This requirement makes up for the tax deduction accountholders can claim when using before-tax dollars to fund a traditional-IRA account. Rules regarding transfers from before-tax, traditional IRA accounts to Roth IRAs require accountholders to pay taxes on the amount transferred since before-tax dollars funded the traditional IRA account. In effect, the entire amount of money in a before-tax traditional IRA account becomes taxable.

Non-Tax Deductible Contributions

People who opt to fund a traditional IRA account with after-tax dollars cannot claim a tax deduction on monies in the account since taxes have been taken out beforehand. As a result, rules for transferring money from a non-tax deductible, traditional IRA account to a Roth IRA do not impose taxes on the entire amount transferred. The amount taxed corresponds with any earnings amounts made on the account. In other words, after-tax contribution amounts transfer tax-free. Anything over and above the contribution amount becomes taxable.

About the Author

I'm currently marketing my first plr articles/ebook package(self authored). Along with this, I'm marketing another ebook(also self authored). My specialty category is anything having to do with the self help field. I've worked for 10 years as an in-home counselor so this is a topic I'm quite familiar with. I can, however, write on most any topic as writing is a genuine passion for me.

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