Rules for Rolling a Traditional IRA to a Roth IRA

You must follow IRS rules for traditional IRA-to-Roth rollovers.

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With a traditional individual retirement account, you get a tax deduction for contributions today but will pay income taxes at retirement. With a Roth IRA you pay the taxes on contributions today and get tax-free income at retirement. The Internal Revenue Service allows rollovers from a traditional IRA to a Roth IRA, but you must follow the guidelines precisely to have a successful rollover transaction.

Income Tax Due

When you withdraw money from your traditional tax-deferred IRA for a rollover to a Roth IRA, you must pay income taxes on the amount you roll over. You add the rollover money to your other taxable income in the year that you turned your traditional IRA into a Roth and pay income tax on the total sum.

60-Day Rule

The IRS requires that you complete your traditional-to-Roth IRA rollover within 60 days. If you deposit your traditional IRA proceeds into your Roth IRA account within the time limit, you will pay income tax only on the rolled-over funds. But if you fail to complete the rollover within the 60-day time window and you are under 59 1/2 years of age, the money will be subject to a 10 percent early withdrawal penalty in addition to income tax.

Alternate Methods

If meeting the 60-day rollover deadline is a concern, you can also convert your traditional IRA to a Roth IRA by a direct trustee-to-trustee transfer rather than having the funds paid to you for a rollover. If you want to stay with the same trustee, you can simply redesignate your traditional IRA as a Roth IRA. No matter the conversion method, you will still owe income tax on the transaction.

Five-Year Rule

You must wait at least five years before you can withdraw the rolled-over funds from your Roth IRA, regardless of your age. If you don’t wait for the required interval, the withdrawal of the rolled-over money will be subject to a 10 percent Roth early withdrawal penalty. Each rollover will have its own separate five-year waiting period.