Both traditional and Roth IRAs have their benefits for workers saving for retirement. With a traditional IRA, you get an upfront tax break, but the money you withdraw is taxed as ordinary income in retirement. The Roth IRA turns that equation on its head, eliminating the immediate tax benefit but giving you the promise of tax-free withdrawals in retirement. Workers can also choose to convert their traditional IRAs to Roth accounts by paying the current taxes now for the benefit of future tax-free withdrawals.
Review a copy of your most recent IRA statement, or log on to your account online for an up to the minute balance. Knowing the balance in your traditional IRA allows you to calculate the taxes you will have to pay to make the conversion.
Enter the numbers into a Roth IRA calculator (See Resources) to determine the tax consequences of converting your traditional IRA to a Roth plan. These calculators are available at a number of different financial websites.
Contact the company that administers your traditional IRA and open a Roth IRA account with them. You do not have to put any new money into the account to open it, since you will be converting your existing IRA to the new Roth IRA. Some administrators, including Vanguard, allow customers to make the conversion online.
Exchange the shares in your traditional IRA to your Roth IRA, either online at the company's website or on the phone with an adviser. Print copies of all your conversion documents and keep them with your tax records. You will receive documentation showing how much you converted, and you will use that documentation to compute the taxes due on the transaction.
Items you will need
- IRA statement
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