How to Make My Traditional IRA Into a Roth IRA

Take future taxes into consideration before you convert to a Roth.

Take future taxes into consideration before you convert to a Roth.

The new tax rule changes to the conversion rules make changing your traditional deductible IRA to a Roth quite beneficial and changing your non-deductible traditional IRA a fantastic opportunity. You no longer have the $100,000 income limitation to make the conversion and if converted in 2010 you can spread the tax over a two-year period. The younger you are, the more you benefit from the tax-free growth of the Roth IRA since your money has more time to grow. If you believe tax rates are going to climb or your income is going to rise, now's the time to convert.

Watch your account for the most beneficial time for conversion. If you invested in stocks or mutual funds that rise and fall, select a time when the market is down to start the conversion. Since you pay tax on the amount you convert, you want it to be the lowest taxable amount.

Check out your taxable incidence. If you have money in a non-deductible traditional plan, you only pay taxes on the growth and not on the principal since it's after tax dollars. Decide whether your taxable amount will rise dramatically by retirement or whether you believe the government will lower tax rates or your income will drop significantly. The longer you have until retirement, the more beneficial the conversion becomes since it has more opportunity to grow.

Convert assets from all IRAs if you're including ones with non-deductible portions, not just the losers. If you have three IRAs and two of them lost money, you can't just convert the two. You have to use funds from all three in proportion to your conversion amount. If your entire IRA money was deductible, there's no problem. In such a case, you can designate any amount from the various accounts.

Calculate the tax you'll owe and check your budget. If you convert in 2010, you have a one-time shot at spreading the taxable incident over a two-year period. However, after that, you take the hit in one year. If you can't afford the extra tax on the full amount, convert only what you can afford in taxes. Look at your top tax rate and multiply it times the taxable conversion amount. If you're converting $20,000 and you're in a 25 percent bracket, your tax is $5,000. Make sure you have the cash to make the conversion. Don't try to use the money from the IRA to pay the tax or you'll pay tax plus penalties on the money you used.

Complete the paperwork. Changing your traditional IRAs to a Roth is simply a matter of filling out paperwork and putting a new label on the account. If you have several accounts at different financial institutions, you also have to consider fees and penalties from the institutions if you put the funds into one larger account at one place.

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