A Roth IRA conversion can be extremely beneficial if you believe your tax rate later on in life will be higher than your current tax rate. Also, if your income is above the threshold for contributing directly to a Roth IRA, a Roth conversion is a great way to still get tax-free income in retirement. If you think a Roth conversion may be for you, keep reading to learn how to rollover a Roth IRA.
There are a few steps to rollover a Roth IRA:
1. Fund your Traditional IRA or employer-sponsored 401(k)
These are the eligible accounts for Roth IRA conversion.
2. Withdraw the funds from those retirement accounts
Your retirement account holder will provide you with an eligible rollover check that needs to be rolled into a Roth IRA within 60 days.
3. Roll funds into a Roth IRA account
Choose the right brokerage for you and open a Roth IRA if you do not have an account already.
4. Pay taxes on your contributions and earnings
Roth IRA contributions are made with after-tax dollars. If you already deducted your traditional IRA contributions, you will now owe taxes on it.
There are also several ways to enact a Roth IRA rollover from a traditional IRA:
- An Indirect Rollover
For an indirect rollover, you will receive a check from your traditional IRA brokerage. You will then have 60 days to deposit this check into your Roth IRA account.
- Trustee-to-Trustee Direct Transfer
An easier way to do a Roth IRA rollover is a trustee-to-trustee direct transfer. You will simply tell your traditional IRA provider that you want to transfer the funds in your account to your Roth IRA at a different financial institution.
- Same Trustee
If you have both IRA accounts at the same financial institution, you can do the same trustee direct transfer. You will just ask your financial institution to transfer the funds from your traditional IRA account to your Roth IRA account.
If you’re converting from an employer-sponsored 401(k) or 403(b) to a Roth IRA:
If you are using funds from an employer-sponsor retirement plan, you need to utilize a trustee-to-trustee transfer so the money is directly transferred to the Roth IRA financial institution you’re using. If your company provides you with the check, you will need to withhold 20% of the funds for taxes. After you receive the check, you will have 60 days to deposit all of the funds into your new Roth IRA account. You will have to make up for the additional 20% that you had to set aside for taxes. If you miss the deadline or do not deposit the full amount, you will be subject to a 10% early withdrawal penalty if you are under the age of 59 & ½.
If you’re wary about completing a Roth IRA rollover yourself, our advisors at FP Wealth Management can help. Schedule a call with us today to get started.