Tax Consequence for a Transfer From a Traditional IRA to a Roth

Report your transfer with IRS Form 1040 or 1040A.

Report your transfer with IRS Form 1040 or 1040A.

Transferring money from a traditional individual retirement account to a Roth IRA may offer several long-term tax benefits. Regardless of whether you're making the transfer because you expect your future tax rate to be higher than your current one or you want to avoid required minimum distributions, the tax consequences are the same.

Taxable Income

Converting from a traditional to a Roth IRA almost always generates taxable income because you're moving money from a tax-deferred account to a tax-free one. Unless you've made nondeductible contributions to your traditional IRA, the full transfer counts as taxable income. If you have made nondeductible contributions, split your transfer proportionally between nondeductible contributions and the remainder of the account, with the nondeductible-contributions portion converting tax-free. For example, if you convert $30,000 and 15 percent of your traditional IRA value comes from nondeductible contributions, $4,500 of the conversion is tax-free.

Tax Rates

The Internal Revenue Service doesn't set a specific tax rate on your traditional to Roth transfers. Instead, the transfer just adds to your taxable income for the year, making it taxed at your marginal rate. For example, a taxable conversion of $30,000 when you fall in the 35 percent tax bracket would cost you $10,500 in taxes, while that same conversion would cost only $4,500 if you fall in the 15 percent bracket.

Reporting

You have to report the transfer on your income taxes, using Form 1040 or 1040A. You'll first have to figure the taxable part of the transfer with Form 8606. Once you've done that, report the total transfer as a nontaxable IRA distribution and the taxable part as a taxable IRA distribution.

Considerations

You have to include the income from the conversion on your taxes in the year you make the conversion, so if you convert on Dec. 31, 2013, it goes on your 2013 return. The IRS did allow a one-time exception if you converted in 2010 where you could elect to include the income on your 2011 and 2012 tax returns, but this is no longer an option.

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