We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Roth IRA Conversion?

By K. Kinsella
Updated: May 17, 2024
Views: 4,101
Share

A Roth Individual Retirement Account (IRA) conversion occurs when an investor in the U.S. transfers funds from a Traditional IRA into a Roth IRA. When an investor makes a Roth IRA conversion, the Internal Revenue Service (IRS) requires the investor to pay ordinary income tax on the funds transferred. After a Roth IRA conversion, the investor does not have to pay tax on the principal or earnings in the Roth IRA, as long as funds are not withdrawn within five years or prior to the investor reaching age 59 and a half. People who access funds from a Roth IRA or a Traditional IRA prematurely have to pay a 10 percent tax penalty.

The IRS allows taxpayers in the U.S. to set money aside for retirement in IRA accounts. Funds inside IRA accounts grow tax deferred. Traditional IRAs are funded with pre-tax earnings, and as a result both the principal and the earnings are fully taxable when the investor makes withdrawals. Withdrawals from Roth IRAs are not subject to taxation because the accounts are funded with after-tax earnings.

Investors can potentially reduce their tax burden by using a Roth IRA conversion to move already accumulated Traditional IRA funds into non-taxable Roth accounts. The investor does pay ordinary income tax at the time of the conversion, but thereafter the account earnings are non-taxable. People who leave funds in a Traditional IRA eventually have to pay taxes on the principal as well as on all future earnings.

The IRS only allows taxpayers earning below certain thresholds to move funds from a Traditional IRA using a Roth IRA conversion. Income limits for these transactions are determined on an annual basis. During 2010, the IRS temporarily relaxed the income restrictions and allowed all taxpayers to convert IRAs regardless of income.

Tax brackets change on a regular basis, so some tax experts argue that a Roth IRA conversion does not necessarily benefit an investor since conversions are usually made on the assumption that future taxes will be higher. Many people are in lower tax brackets when they retire, so the taxes due on a Traditional IRA withdrawal are often less than they would have had to pay for accessing funds during their working years when making a Roth IRA conversion. In a down market many investors experience minimal growth on their investments, and there is no tax benefit to a Roth conversion if the invested assets do not continue to grow.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-is-a-roth-ira-conversion.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.