Roth IRA Conversion: Definition And Rules

A Roth conversion turns a qualified employer sponsored retirement plan into a Roth IRA. It can bring long-term tax benefits, but you may face a tax bill.
analyze-taxes-fix-your-finances

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.


The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Updated · 2 min read
Profile photo of Arielle O'Shea
Written by Arielle O'Shea
Lead Assigning Editor
Profile photo of Michael Randall
Reviewed by Michael Randall
Certified Financial Planner®
Profile photo of Chris Hutchison
Edited by Chris Hutchison
Lead Assigning Editor
Fact Checked
Profile photo of June Sham
Co-written by June Sham
Lead Writer

One of the best features of a Roth IRA is tax-free withdrawals during retirement. Unlike a traditional IRA, you also aren’t forced to take distributions after a certain age, so the money can keep growing.

But there are caveats as well. In addition to paying taxes upfront on Roth IRA contributions, there are also income restrictions. If this applies to you, and you want to keep growing your Roth IRA, consider a Roth IRA conversion.

Advertisement
NerdWallet rating 

4.8

/5
NerdWallet rating 

5.0

/5
NerdWallet rating 

4.6

/5

Fees 

$0

per online equity trade

Fees 

$0.005

per share; as low as $0.0005 with volume discounts

Fees 

$0

Account minimum 

$0

Account minimum 

$0

Account minimum 

$0

Promotion 

None

no promotion available at this time

Promotion 

Exclusive!

U.S. residents who open a new IBKR Pro account will receive a 0.25% rate reduction on margin loans. Terms apply.

Promotion 

Earn up to $10,000

when you transfer your investment portfolio to Public.

Roth IRA conversion rules

A Roth IRA conversion shifts money from a traditional IRA or a qualified employer-sponsored retirement plan into a Roth IRA. These conversions are ideal for people who want tax-free investment earnings, to lower taxable income in retirement, or don't want to bother with required minimum distributions.

To stay in sync with IRS Roth IRA conversion rules, you’ll need 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 a 401(k), 403(b) or other employer-sponsored retirement fund 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).

» Learn more: Also sometimes called a backdoor IRA conversion, Roth IRA conversions are accessible to almost anyone.

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

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

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

  • You think your tax rate in retirement may be higher than it is now.

  • You want to avoid required minimum distributions (RMDs). (The IRS mandates that RMDs from a traditional IRA start at age 75 unless you were born before January 1, 1960, in which case RMDs begin at age 73.)

» Use our Roth IRA calculator to discover how much you could save in taxes by converting

A Roth IRA conversion might be wrong for you 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.

  • 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.

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

  • You want to avoid being moved into higher Medicare premiums.

How to do a Roth IRA conversion

Here are the essential steps in a Roth IRA conversion. You can skip step No. 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 an IRA and fund it.

  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 effectively need to give that tax deduction back. 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.

» Ready to get started? See our picks for the best Roth IRA providers. We compare providers across a variety of metrics, including fees, minimum account balance and tools.

Nerdwallet advisors logo
Advertisement

1

Answer a few simple questions

2

Get a recommended match

3

Start achieving your money goals

What's your financial priority?

Financial Planning
Retirement Planning
Investment Management
Tax Strategy
Other

How do I avoid taxes on a Roth IRA conversion?

You can't necessarily avoid taxes altogether when doing a Roth conversion, but you can reduce the amount of taxes you 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 the filing deadline (usually in mid-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, such as nondeductible contributions. The IRS is on to that strategy.)

Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.
Nerdwallet advisors logo

Get matched to a trusted financial advisor for free with NerdWallet Advisors Match.

Illustration
Advertisement