Taxes on Traditional to Roth IRA

Use Form 1040 or Form 1040A to file taxes with an IRA conversion.

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Roth individual retirement arrangements allow you to take tax-free distributions and avoid any required minimum distributions while you're alive. If you're anticipating a higher tax bracket in the future, or just want to avoid required minimum distributions, you may want to look into converting a traditional IRA to a Roth. In 2010 the Internal Revenue Service lifted the income limits on who could convert to a Roth IRA, so now converting is an option regardless of your income.

Conversions and Taxable Income

Converting from a traditional IRA to Roth IRAs results in taxable income, just like if you had taken a distribution. However, you won't have to pay any early withdrawal penalties for converting to a Roth IRA, even if you're not yet 59 1/2 years old.

Nondeductible Contributions

If you made nondeductible contributions to the traditional IRA, you won't pay tax on those contributions when you convert to the Roth. However, you can't choose to convert only the nondeductible portion of the account. Instead, you're required to prorate your conversion between the nondeductible contributions and the remainder of the account. The portion attributable to nondeductible contributions converts tax-free. For example, if you convert $10,000 of a traditional IRA that is 34 percent nondeductible contributions, $3,400 of the conversion is tax-free.

Tax Rates

IRA distributions are normally treated as ordinary income, and conversions are no different. Depending on the size of your conversion, you might find yourself in a higher tax bracket. However, that's not as bad as it sounds, because the higher rate only applies to the amount of income that falls in the higher bracket. Say that before the conversion you're in the 25 percent bracket, but only $2,000 from the 28 percent bracket. If you convert $10,000, the first $2,000 is taxed at 25 percent and only the last $8,000 is taxed at 28 percent.

Tax Reporting

You must take a few extra steps to report your IRA conversion on your income taxes. First, you must use Form 1040 or Form 1040A; Form 1040EZ isn't an option. Report the entire amount of the conversion on line 15a of Form 1040 or line 11a of Form 1040A. Then use Form 8606 to calculate the taxable portion of the conversion and report that amount on line 15b of Form 1040 or line 11b of Form 1040A.