How to Convert an IRA to Multiple Roths
Traditional IRAs allow you to put away money for retirement tax free until you withdraw the money after retirement. Once you begin taking your retirement distributions from your traditional IRA, you’ll owe taxes on the contributions and earnings you take out of the account. With a Roth IRA you pay taxes on the money when you invest it, rather than pay them when you withdraw the funds after retirement. You can convert an existing traditional IRA to a Roth IRA and pay taxes on the money the year you make the conversion. Converting your IRA to multiple Roth accounts allows you more flexibility in investing the funds.
Choose a custodian for your Roth IRA accounts. This can be the same financial firm where you’ve invested your traditional IRA, a different company or even several companies.Step 2
Decide how many Roth IRA accounts you want to open and how you’ll allocate the funds in your existing IRA to these accounts. The law doesn’t limit you to a specific number of accounts, but you should keep in mind any minimum deposits required to open an account, and any management fees associated with the accounts.Step 3
Open your new Roth IRA accounts with your chosen financial institution and select investments for the accounts. Multiple accounts allow you to choose different investment strategies and asset types for each account. If, at the end of the year you discover you can’t afford to pay all the income tax you owe as the result of the conversion, multiple accounts make it easier to recharacterize part of the funds back to a traditional IRA to reduce your tax burden.Step 4
Instruct the financial institution that handles your traditional IRA to transfer the funds in the IRA to your new Roth IRAs. Designate how much money is to go to each Roth IRA. The trustee will contact the trustee of your Roth accounts and take care of the transfer.Step 5
Report the amount you converted to the Roth IRAs on your federal income tax as income. In 2010 and 2011, IRS regulations allowed you to split this amount over two tax years, to spread out the tax burden. Check regulations for your tax year to determine if this rule still applies.
- IRS: Publication 590 – Individual Retirement Arrangements (IRAs) (p 60)
- The Roth Revolution – Pay Taxes Once and Never Again; James Lange
- The more accounts you have, the more fees you’re likely to incur.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.