Rolling over a traditional IRA to a Roth IRA makes good financial sense for many people. You could save a lot of money on taxes in the long run. However, you must be aware that there are restrictions and penalties that must be considered before making the decision to roll over a traditional IRA to a Roth IRA.
Understand the differences between a traditional IRA and a Roth IRA. Contributions to a traditional IRA are deductible for certain investors while contributions to a Roth IRA are not. However, distributions from a traditional IRA are taxed while Roth IRA distributions are not taxed. You must ask yourself if you would rather pay taxes now or when you retire.
Consider the income limits on traditional and Roth IRA's. If your income is in the six figures, check with the Internal Revenue Service. You cannot open or contribute to a Roth IRA if you make too much money that year. Contribution amounts can also be decreased for certain income levels. Anyone can contribute to a traditional IRA but high income earners may not be able to deduct the contribution from their taxes.
Consider the age limits on traditional and Roth IRA's. You are not allowed to make contributions to a traditional IRA in the tax year you reach the age of 70 years and six months. You can contribute to a Roth IRA at any age.
Consider the distribution rules on traditional and Roth IRA's. Traditional IRA's force you to start taking distributions by April 1st the year after reaching 70 years and six months. There are no such requirements for a Roth IRA.
Realize that rolling over your traditional IRA to a Roth IRA requires that you pay taxes on all the gains made by your Traditional IRA. You are essentially cashing out your Traditional IRA and paying taxes then reinvesting the funds in a Roth IRA. The idea is to pay taxes now so you can avoid paying taxes when you retire. This makes sense for someone who has a long time until retirement or doesn't like the traditional IRA rules.
Call whomever holds your traditional IRA and tell them you want to roll it into a Roth IRA. They can handle all the paperwork for you if you plan to keep the Roth IRA with them. If you are rolling it over to another company then you need to contact them as well.
Understand that Roth IRA distributions are tax and penalty free as long as you follow certain rules. You must wait at least five years after opening the Roth IRA and have a good reason. These reasons include the purchase of a first home, disability, death or reaching the age of 59 years and six months.
If you plan to be in a high tax bracket during retirement then a Roth IRA is a good option since you don't pay taxes on distributions. If you want a tax deduction now and will be in a lower tax bracket during retirement then a traditional IRA may be better for you.
Always check with the Internal Revenue Service before rolling over any IRA. There are income limits on Roth IRA contributions. If you exceed these limits that year you can't open a Roth IRA. You must also keep your investment in the Roth IRA for at least five years to avoid penalties.
Things You'll Need
Internet connection or telephone
Records from your traditional IRA