Tax Laws for Transferring Funds from a Regular IRA to a Roth IRA

You might be one of the people who get a better tax deal from Uncle Sam if you switch your retirement savings from a traditional IRA to a Roth. But be careful, because that’s not always the case. Consult a financial professional who is familiar with IRAs before you transfer funds from a regular IRA to a Roth IRA. A regular, or traditional, IRA gives you different tax breaks than a Roth IRA.

IRAs & Tax Breaks

Before you can understand the tax laws for transferring funds from a regular IRA to a Roth IRA, you need to know how IRA tax breaks work. The money in either type of IRA is not taxable as long as it stays in the account. You get to deduct contributions to traditional IRAs from your taxes, but you must pay taxes on funds you withdraw. Traditional IRA funds are referred to as pre-tax dollars. You don’t get a tax break for Roth contributions, but all the money in the account is exempt from income taxes if properly withdrawn after you reach age 59 1/2. All Roth funds are considered after-tax dollars.


When you transfer money from a traditional IRA to a Roth IRA, it is called a conversion because you have to convert the funds from pre-tax dollars to after-tax dollars. In practice, this means you have to pay income taxes on all of the money you transfer. There is one exception: If you have made nondeductible contributions to a traditional IRA, those contributions are already after-tax dollars, so you don’t have to pay taxes on them. When you convert funds to a Roth IRA, you can’t move only nondeductible contributions. The IRS makes you include taxable money as well.

Moving Funds

There are three ways to transfer funds from a regular IRA to a Roth IRA. You can roll over the money by withdrawing it from your traditional IRA. With a rollover, you have 60 days to deposit the money into the Roth IRA. If you miss the deadline, you will get hit with a 10-percent penalty tax. The other two methods are a trustee-to-trustee transfer from one financial institution to another and a same-trustee transfer within a single financial institution. With trustee transfers, you tell the trustee where to send the money and she completes the transfer. Trustee transfers eliminate the risk of missing the 60-day deadline due to an unforeseen glitch.

Paying the Taxes

When you convert a traditional IRA to a Roth, use IRS Form 8606 to report the transferred funds as income for the tax year in which you make the conversion. All of the transferred money is considered ordinary income. Transferred funds can’t qualify for capital-gains tax rates. If you are not yet age 59 1/2, you should use money from a non-IRA source such as a savings account to pay the taxes. This is because all of the transferred money is supposed to go into the Roth IRA. If you hold out money to pay the taxes, the IRS considers it an early distribution, and you will be stuck with a 10-percent penalty tax on top of ordinary income taxes on the money that isn’t put into the Roth.

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