Maybe you've had a slow year of sales or you've been laid off, but if you find yourself in a lower tax break, it might be a great year to convert your self-directed IRA to a self-directed Roth IRA. You can pay the tax on the conversion at the lower rate and then take all your distributions, including any gains you generate, tax-free at retirement. Even though the IRA is self-directed, you still have to have a financial institution serve as the custodian of the account for it to be treated as an IRA. Though each financial institution has its own forms, the process is generally the same. After completing the conversion, you will need to include it on your taxes.
Step 1
Contact your IRA custodian to get the forms you need to convert your self-directed traditional IRA to a self-directed Roth IRA. Some financial institutions will require you to separately open a Roth IRA first and then request a transfer of the funds. Other financial institutions may allow you to complete the conversion with one request.
Step 2
Complete the forms and submit them to your financial institution. Some will require you to submit paper copies, but others will allow you to request the conversion online. Generally, you need to provide your identifying information, including your name, address and Social Security number, the amount that you want converted, and the account information for the self-directed IRA and your self-directed Roth IRA.
Step 3
Report the amount of the conversion as a tax-free IRA distribution and use Form 8606 to figure the taxable portion. You can use either Form 1040 or Form 1040A to file your taxes. If you haven't made any nondeductible contributions to the self-directed traditional IRA, the entire conversion counts as taxable income.
Step 4
Report the taxable portion of the conversion as a taxable IRA distribution on your taxes. This is the amount that gets included in your taxable income. The remainder of your tax return is the same as if you didn't convert during the year.
