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Convert a Traditional IRA to a Roth IRA

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 2/9/2009

Converting a traditional IRA to a Roth IRA can be a great move, but there are many rules and restrictions. Then, you need to determine if it is worth it or if you should convert your traditional IRA to a Roth IRA.

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    Difference Between Traditional IRA and Roth IRA

    To understand why whether it is a good idea to convert a traditional IRA to a Roth IRA, it is first necessary to know all about the differences between a traditional IRA and a Roth IRA.

    In a nutshell, the traditional IRA may offer some people the ability to deduct their contributions and pay less taxes right away. The Roth IRA does not offer any sort of immediate tax deduction, but withdrawals made during retirement are tax-free.

    So how do you decide whether a traditional IRA or a Roth IRA is best for you? Which IRA is better depends mostly on how long you have until you will retire and start withdrawing money from a traditional IRA or Roth IRA. The longer it is until retirement, the better deal the Roth IRA becomes. This is because there will be more time for the money inside the IRA to grow significantly. In that case, the ability to take money out of an IRA tax-free will be worth more than the ability to take a tax deduction today.

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    Converting a Traditional IRA to a Roth IRA

    dollar-100-bill In order to convert a traditional IRA to a Roth IRA, you must pay taxes on the traditional IRA. Basically, you will owe income taxes on the amount of money in the traditional IRA minus the amount of non-deductible contributions you made to the IRA account. This amount is taxed as ordinary income; there is no difference between capital gains, dividends, or interest in the account.

    You can convert a 401(k) to a Roth IRA by first rolling it over to a traditional IRA. Converting the 401(k) to a traditional IRA is a tax-free process if done correctly.

    You can only do a Roth IRA conversion if your household adjusted gross income, or AGI, is less than $100,000. There is no different limit for married filing jointly or filing as single.

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    How-To Convert a Traditional IRA to a Roth IRA

    The step-by-step process how-to actually convert a traditional IRA to a Roth IRA is actually fairly easy. First, notify the custodian of your traditional IRA that you would like to convert the IRA to a Roth IRA. They may have you sign a form saying that you understand what you are doing, but they will handle the rest.

    Then, you’ll get a form from the custodian that you will use to file your federal income taxes and pay the tax required on the conversion on your regular income tax form, usually a Form 1040.

    If you made non-deductible contributions to the traditional IRA, you may also need to file Form 8606 to account for those contributions so that you do not have to pay taxes on that part of the conversion.

    That’s it.

    Read here on Bright Hub for advice on whether it is worth it to convert to a Roth IRA and if you should convert to a Roth IRA this year.