How to Do a Roth IRA Conversion in 3 Steps

A Roth conversion turns a traditional IRA into a Roth IRA, which can bring long-term tax benefits. But you may face a tax bill in the year you convert.

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There are a lot of reasons to consider a Roth IRA conversion, which shifts money from a traditional IRA into a Roth IRA.

Here's how to convert an existing retirement account into a Roth, along with guidance on whether it makes sense for you.

How to convert to a Roth

Here are the essential steps in a Roth IRA conversion. You can skip step 1 if you already have a traditional IRA.

  1. Put money in a traditional IRA account. If you don’t already have an account, you will need to open one and fund it. Here's how to open an IRA.

  2. Pay taxes on your IRA contributions and gains. Only post-tax dollars get to go into Roth IRAs. So if you deducted your traditional IRA contributions, you’ll need to give that tax deduction back, effectively. Those IRA contributions, and any investment gains, will be added to your taxable income when you file your tax return for the year.

  3. Convert the account to a Roth IRA. If you don’t already have a Roth IRA, you’ll open a new account during the conversion. Your IRA administrator will give you the instructions and paperwork. Here are our picks for the best Roth IRA providers.

To stay in sync with IRS rules, you’ll want to convert your traditional IRA to a Roth IRA in one of the following ways:

  • Indirect rollover: You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days.

  • Trustee-to-trustee or direct rollover: You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution.

  • Same trustee transfer: If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

You may be able to do a rollover of 401(k), 403(b) or other employer-sponsored retirement funds to a Roth if you are no longer working for the company, but as with the traditional-IRA-to-Roth rollover, you’re likely to trigger a tax bill here, too, unless you’re starting with a Roth 401(k).

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Timing your Roth conversion

To reduce the taxes you’ll owe on the rollover, consider timing it in one of these ways:

  • In a year you fall in a lower tax rate than normal. Maybe you switched jobs, had a period of unemployment or didn’t qualify for your usual bonus.

  • When your traditional IRA account balance is down. If the market takes a hit and your IRA feels the aftershock, that could be an opportune time to launch this strategy.

  • Early in the tax year. Taxes don’t have to be paid in full until April the following year, so converting early in the calendar year gives you more time to pay Uncle Sam. (If you pay estimated taxes, you might have to make payments sooner.)

  • Bit by bit, as you can afford to pay the taxes. You do not have to convert your full balance. (You can’t, however, convert only the portion of your balance that wouldn’t be taxed, like nondeductible contributions. The IRS is on to that strategy.)

A Roth IRA conversion could be right for you ...

Generally, a Roth IRA is an excellent choice when any of the following situations apply:

  • If you like the idea of your investment earnings growing tax-free.

  • If you want the ability to lower your taxable income in retirement.

  • If you think maybe your tax rate in retirement will be higher than it is now.

  • If you want to avoid required minimum distributions, which the IRS mandates at age 72 from a traditional IRA.

A Roth IRA conversion might be wrong for you ...

There are some instances in which a Roth conversion may be more trouble than it’s worth:

  • If you lack the cash to pay the likely tax bill generated by the conversion. Some people pay the tax bill with part of the converted balance, but that sacrifices some of the tax-free investment growth. And if you’re under 59½, you may open yourself up to a 10% tax penalty on that money.

  • If you need the money in the next five years. Distributions of earnings and rolled-over amounts risk being hit with income taxes and even that 10% penalty from the IRS if they’re withdrawn before the five-year mark. Learn more about the Roth five-year rules if you fall into this category.

  • If the rollover will subject you to a higher marginal tax bracket the year of the switch. This increase may make the strategy less attractive in some cases.

» Still uncertain? If you need some guidance on picking the best account for you, check out our full list of the best Roth IRAs. We compare providers across a variety of metrics, including fees, minimum account balance and tools.

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