Converting to a Roth IRA can lead to tax-free withdrawals in retirement. Learn how to convert your IRA and optimize your tax strategy with Vanguard.
How to convert an IRA to a Roth IRA
What does it mean to convert an IRA to a Roth IRA?
A Roth IRA conversion means moving money from a traditional IRA or other pre-tax retirement account into a Roth IRA, which allows for qualified tax-free distributions in retirement assuming certain conditions are met.1 Investors may convert as part of a long-term tax strategy or to build a more flexible retirement plan. You'll pay income tax on the amount converted that year, then your investment can grow tax-free.
Investors may convert as part of a long-term tax strategy or to build a more flexible retirement plan.
A Roth IRA offers the following benefits:
- Tax-free retirement income. By paying taxes now, you can reduce your tax burden down the road. Qualified withdrawals will be entirely tax-free.
- No required minimum distributions (RMDs). Unlike a traditional IRA, a Roth IRA doesn't require withdrawals at age 73.2 That means more time to grow your money tax-free and greater control over your income strategy in retirement.
- Estate protection. A Roth IRA can be passed on to beneficiaries with continued tax benefits, helping to preserve more of your assets. Heirs will have to take RMDs, but if the account has been open for at least 5 years, their withdrawals will be tax-free.
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Should you convert your IRA to a Roth?
The decision to convert from a traditional IRA or other pre-tax retirement plan, such as a 401(k), to a Roth IRA should be based on your personal financial situation.3 Before choosing to convert, it's important to:
- Consider your tax implications. A Roth IRA conversion is taxable in the year it occurs. Consider how you'll pay the taxes—with converted assets or other funds—and whether the additional income will move you into a higher tax bracket.
- Think about your future tax bracket. If you expect your tax rate to be higher in the future, or if you have a long time horizon for the funds to grow, converting to a Roth can potentially result in tax savings. If you expect your tax bracket to be lower in the future, you may end up paying more in taxes through the conversion than you would have with a traditional IRA or retirement plan.
- Keep in mind that a Roth IRA conversion is permanent. Once you convert, it cannot be reversed.
- Ensure you don't need the funds for at least 5 years. Roth IRAs are designed for long-term growth. The longer your money remains in the Roth IRA, the more time it has to grow tax-free. Once you convert to a Roth IRA, there's a 5-year waiting period for tax-free withdrawals. If you withdraw before the 5-year period, you could end up paying a tax on the earnings. Additionally, if you withdraw before the 5-year period and you're under 59½, you'll pay a penalty on the converted amount you withdraw, plus a tax and penalty on the earnings.
Personalized financial advice can help you decide if a conversion is right for you based on your unique circumstances.
Explore tax-free growth with a Roth IRA conversion.
Step-by-step: How to convert an IRA to a Roth IRA
Step 1: Confirm your account is eligible
You can convert some or all of the assets from most traditional IRAs or other pre-tax retirement accounts, such as through a 401(k) rollover, to a Roth IRA. Before initiating a conversion, ensure your account is eligible and review any plan-specific restrictions.
If you are considering transferring an IRA to Vanguard, learn more about account transfers about account transfers and get started.
Step 2: Open a Roth IRA (if you don't already have one)
You need a Roth IRA to receive converted assets. If you already have a Roth IRA, confirm the details of your account prior to converting. If you don't have one already, open an account today.
Step 3: Decide how much to convert (full or partial)
When converting to a Roth IRA, you can move some or all of your assets. A full conversion creates a single tax event, while partial conversions let you spread the tax impact over several years. This can help you stay within a lower tax bracket or, if you're on or within 2 years of registering for Medicare, avoid triggering higher premiums.
If you're planning to convert a significant amount of money, it pays to calculate whether the conversion will push a portion of your income into a higher bracket.
Whether you choose a full or partial conversion, each option has different tax impacts and planning considerations. Use the table below to compare full and partial conversions to see which approach best fits your financial plan.
Full versus partial conversion considerations
| Full Conversion | Partial Conversion | |
|---|---|---|
| Definition | Converting the entire balance of a traditional IRA or other pre-tax retirement account to a Roth IRA. |
Converting only a portion of a traditional IRA balance to a Roth IRA. |
| Tax Implications | Higher immediate tax liability. | Phased tax liability. |
| Flexibility | Less flexible. The decision is made for the entire balance. | More flexible. Allows for strategic conversions over time. |
| Effect on RMDs at age 73 | Eliminates RMDs for the entire converted balance. | Reduces RMDs proportionally to the converted amount. |
| Investment growth | Potential for greater tax-free growth over the long term. | Potential for some tax-free growth, but less than with a full conversion. |
| Complexity | Simpler in terms of paperwork and planning. | More complex, requiring careful planning and tracking of multiple conversion amounts. |
| Suitability | May be suitable for individuals who expect to be in a higher tax bracket in retirement and want to reduce the tax burden they could incur. | May be suitable for individuals with a lower income who want to reduce upfront costs. |
Weigh the pros and cons of full and partial conversions.
Pros of a full conversion
- No RMDs. Once converted, the entire balance is free from Required Minimum Distributions (RMDs), which can simplify retirement planning.
- Maximized tax-free growth. The entire balance can grow tax-free, providing the maximum benefit over the long term.
- Simplified planning. A full conversion has fewer administrative tasks and less complexity in managing multiple accounts.
Pros of a partial conversion
- Lower tax liability. Smaller conversions result in lower immediate tax bills, making it easier to manage.
- ReducedRMDs. Proportionally reduces RMDs, which can help in managing retirement income.
- Tax benefits. Allows for strategic conversions to stay within a desired tax bracket.
- Greater Flexibility. Provides more control over the timing and amount of conversions, allowing for adjustments based on financial circumstances.
- Minimal Medicare impact. Smaller income increases could help manage the impact to Medicare premiums.3
Cons of a full conversion
- More tax liability. The larger the converted amount, the larger the immediate tax bill. Plus, your conversion income can push you into a higher tax bracket, increasing your tax rate.
- Higher Medicare premiums. It can significantly increase your income, which can potentially trigger higher Medicare premiums.3
Cons of a partial conversion
- Potential for missed tax opportunities. If not planned carefully, you might miss out on the full benefits of tax-free growth.
- Extended timeline. The process takes longer, delaying the full realization of benefits.
- Multiple holding periods. Each partial conversion has its own 5-year holding period for tax-free withdrawals, which can be complex to manage and track.
Step 4: Complete the conversion
Log in to your account with your plan provider and follow the prompts to convert your pre-tax retirement account assets. You may be asked to choose which account to convert from, how much to convert, and whether you want taxes withheld. You'll receive confirmation that will indicate the transaction is complete. Retain this for your records.
Step 5: Pay taxes on your Roth conversion
The amount you convert will be treated as taxable income in the year of conversion. You can pay taxes from the converted funds or from another source. Using outside funds may allow more of your converted amount to stay invested with the potential to grow tax-free.
You'll receive a Form 1099-R and a Form 5498 the year following the conversion.
Frequently asked questions about converting a traditional IRA to a Roth IRA
No. A Roth conversion is a transfer of funds from a traditional IRA or other eligible account into a Roth IRA. It doesn't count toward your annual Roth IRA contribution limit.
No. An inherited IRA can't be directly converted to a Roth IRA. If you're a spouse beneficiary, you would first need to transfer the inherited IRA into a traditional IRA in your own name and then convert it to a Roth IRA. Non-spouse beneficiaries are not permitted to convert inherited IRA assets to a Roth IRA, although they may be able to transfer assets to an inherited Roth IRA if the original account was already a Roth.
If you have both pre-tax and after-tax dollars in any of your IRAs, the pro rata rule requires that any conversion to a Roth IRA includes a proportionate share of both. You can't convert only the after-tax, or non-deductible, portion.
Roth IRA conversions are often most beneficial when your income and tax rate are lower than usual, before RMDs are due, and during market downturns, as you'll pay taxes on a lower account value. Converting during a low-income year can help reduce the overall tax impact. Whether you choose a full or partial conversion can also affect your timing. A full conversion creates a single tax event that year, while partial conversions allow you to spread the tax impact over several years.
No. Required minimum distributions (RMDs) must be taken before you can convert any traditional IRA assets to a Roth IRA.
Yes. There's no age limit for doing a Roth conversion—as long as you meet the eligibility requirements and understand the tax implications.