There are plenty of reasons to consider a Roth individual retirement account (IRA) rollover, which transfers funds from an existing traditional IRA (or another retirement account) into a Roth IRA. Here's a quick look at how to convert to a Roth IRA, plus considerations when deciding whether it makes sense for you.

Key Takeaways

  • A Roth IRA rollover (or conversion) shifts money from a traditional IRA or 401(k) into a Roth.
  • You can get around Roth IRA income limits by doing a rollover.
  • You'll owe tax on any amount you convert, and it could be substantial.

How to Convert to a Roth IRA

Most major brokerage firms make it easy to convert to a Roth. In general, it's a three-step process:

  1. Fund your traditional IRA (or another retirement account). If you don't have one already, you'll have to open and fund one first.
  2. Pay taxes on your contributions and gains. You make Roth IRA contributions with after-tax dollars. If you already deducted your traditional IRA contributions, you'll owe taxes now.  This sounds like an easy enough step, but keep in mind that the tax burden could be substantial.
  3. Convert the account to a Roth IRA. If you don't have a Roth IRA yet, you'll open one during the rollover.

Roth IRA Rollover Methods

The simplest way to convert to a Roth is a trustee-to-trustee or direct rollover from one financial institution to another. Tell your traditional IRA provider that you'd like to transfer the money directly to your Roth IRA provider.

If both IRAs are at the same firm, you can ask your financial institution to transfer a specific amount from your traditional IRA to your Roth. This method is called a same trustee transfer.

With an indirect rollover, you receive a distribution from your traditional IRA. You then have 60 days to deposit it into your Roth IRA.

Converting from a 401(k)

You can convert other retirement accounts, such as an employer-sponsored 401(k) or 403(b) plan, too, once you leave your job. Some plans let you access the money while you’re still working—an “in-service distribution.” However, you usually have to reach age 59½ before you can do so.

If you want to convert assets from your 401(k) or another employer-sponsored plan to a Roth IRA, make sure the money is transferred directly to the financial institution. If your company issues the check to you, it must withhold 20% of the account balance for tax purposes.

Then, you’ll have just 60 days to deposit all the money into a new Roth account—including the 20% that you didn’t receive. Miss the deadline and any money not rolled over to a Roth IRA will be subject to a 10% early withdrawal penalty if you're younger than 59 ½. And you'll still be on the hook for income taxes on the entire converted amount.

Roth IRA Advantages

Roth IRAs offer several key benefits not offered by other retirement plans.

For starters, Roth IRA earnings grow tax-free, and withdrawals in retirement are tax-free, as well. Also, you can withdraw your contributions at any time, regardless of your age. What's more, there are no required minimum distributions (RMDs) for Roth IRAs while you're alive. That means if you don't need the money, you can leave the account alone and pass it to your heirs.

A Roth conversion is especially attractive if you expect your future tax rate to be higher than your current rate. And if your earnings are high enough to prevent you from contributing directly to a Roth IRA, you can use a Roth conversion as a backdoor entry into future tax-free income in retirement.

Should You Convert to a Roth IRA Now?

Once you’ve decided a Roth IRA is your best retirement choice, the decision to convert comes down to your current year’s tax bill. That’s because when you move money from a pre-tax retirement account, such as a traditional IRA or 401(k), to a Roth, you have to pay taxes on that income.

  • Roth IRAs boast huge tax advantages, including tax-free growth and tax-free withdrawals in retirement. 

  • You can withdraw contributions at any time, for any reason, tax-free.

  • Unlike traditional IRAs and 401(k), a Roth doesn't have required minimum distributions.

  • You pay tax on the conversion—and it could be substantial.

  • You may not benefit if your tax rate is lower in the future.

  • You must wait five years to take tax-free withdrawals from the Roth, even if you’re already age 59½.

It makes sense: If you had put that money into a Roth originally, you would have paid taxes on it for the year when you contributed.

A Roth IRA rollover is most beneficial when:

  • You have the cash on hand to pay the taxes. You may be tempted to use some of the converted funds to cover your taxes. But that means you'll miss out on years or decades of tax-free growth on that money. And, you might owe a 10% penalty on the money.
  • It doesn’t trigger onerous tax consequences. Be careful: The amount you convert, when you add it to your current year’s income, could move you into a higher tax bracket or subject you to taxes you otherwise wouldn’t pay. For example, retirees who convert assets to a Roth IRA could end up paying more tax on their Social Security benefits and higher Medicare premiums if the converted amount lifts their income above certain levels. A tax advisor can help crunch the numbers.
  • Your existing IRA account has suffered recent losses. A lower balance in your traditional IRA means you’ll owe less tax at conversion time and have a greater potential for tax-free growth. If you convert existing retirement account balances to a Roth IRA this calendar year, you’ll pay the tax when you file your tax return at the tax deadline next year.
  • You're in a lower tax bracket than usual, perhaps because you worked less, switched jobs, or missed a bonus.
  • You have more itemizable deductions than usual, which can help lower your taxable income.
  • You earn too much to contribute to a Roth in the current year, but you expect to have a higher tax rate during retirement.

The Bottom Line

Converting to a Roth IRA is easier than ever. You can transfer some or all of your existing traditional IRA (or another retirement account) balance to a Roth IRA, regardless of your income. But keep in mind that income-eligibility restrictions still apply to current-year contributions.

Once the conversion is complete, congratulate yourself. You’ve just signed on for years of tax-free growth. It can be all the difference between a stressful—and a blissful—retirement.