You have 60 days to convert a traditional IRA to a Roth IRA before the Internal Revenue Service considers the conversion a distribution and penalizes the withdrawal. To convert the funds, you must roll over your traditional IRA monies into your Roth IRA, and income taxes are applicable no matter what rollover method you use.
If you prefer a hands-on approach to your IRA conversion, perform a rollover to move your traditional IRA funds into your Roth IRA; “hands-on” is literal here, as the money directly touches your hands during the conversion process. Have your traditional IRA funds disbursed directly to you, and deposit the traditional IRA funds into your Roth account. You must ensure the monies are deposited into your Roth IRA prior to the 60-day deadline. If you fail to deposit the money in time, the IRS will treat the rollover as a distribution and penalize the disbursement.
A direct, or “trustee-to-trustee” transfer, is the rollover approach to take for investors who don’t want to worry about getting the traditional money into the Roth account on time themselves. This approach takes the “middleman” -- you -- out of the equation. Conducting the trustee-to-trustee transfer is a simple process, wherein your traditional IRA trustee transfers the money directly to your Roth IRA trustee. Even though you are not responsible for depositing the money into the Roth IRA yourself, the money still needs to show up in the Roth IRA before the 60-day deadline, so follow up with both institutions to ensure your funds are transferred in a timely manner.
Same Financial Institution
You can also conduct a “same trustee transfer” if both your traditional and Roth IRAs are in the same financial institution. In this case, simply contact your IRA trustee and designate the amount of funds you would like converted between the two accounts. In most cases, this transfer request can be done online or via telephone, or your financial institution may have paperwork you need to fill out in person. The 60-day timeline still applies.
When converting a traditional IRA to a Roth IRA, you will incur a tax liability. Traditional IRAs are funded with pretax dollars, Roth IRAs with post-tax. You haven’t paid any taxes on your traditional IRA funds yet, and when you pull them out of the account -- even in a rollover -- Uncle Sam wants his part. Additionally, you are placing the traditional IRA funds into an account structure designed to allow tax-free distributions at retirement time; consequently, you must pay taxes on the money now. Your financial institution can automatically deduct both your federal and state -- if applicable -- tax obligation prior to disbursing the funds. You are responsible for reporting the rollover on IRS Form 8606 at tax time.