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Expert Q&A Archive

01/15/2009
Do you have to pay any taxes to transfer your traditional IRA to a Roth IRA?
Do you have to pay any taxes to transfer your traditional IRA to a Roth IRA?
Gail Rosen, CPA:
expert info »
You may be able to roll funds over from a regular IRA into a Roth IRA so the post-rollover income can grow tax-free in the Roth IRA. (Converting a regular IRA into a Roth IRA is treated as such a rollover.) You can roll funds over from a regular IRA to a Roth IRA only if your Adjusted Gross Income (AGI), calculated with specified modifications, does not exceed $100,000 in the rollover year. Any funds rolled over will be taxed under the regular IRA distribution rules as if there were no rollover. The 10% early withdrawal penalty will not apply
to the rollover. However, if rolled over funds are withdrawn within the five year period that renders them taxable, the 10% penalty will apply to the withdrawal. (Beginning in 2010, the $100,000 AGI ceiling on conversions from a traditional IRA to a Roth IRA will be removed.)
Rachel Lane, CFP:
expert info »
Yes, you do have to pay taxes on the amount that you convert from a Traditional IRA to a Roth IRA. For example, if you have a $10,000 Traditional IRA and you convert $5,000 of it to a Roth, assuming a 28% marginal tax bracket, your taxes would be approximately $1,400. From then on, your investment in the Roth grows tax-deferred, and later the withdrawals will be tax-free (under current tax laws).
Gary Silverman, CFP®:
expert info »
Not at the time of transfer, but any money that leaves your traditional IRA will be added to your income at tax time. The part that ends up as a conversion to a Roth IRA is still taxed, but what you get out of is the penalty that you might be subject to if under 59-1/2.

That is why we generally recommend only doing a Roth conversion if you can pay the taxes using money that is outside the IRA. Otherwise, if you use part of the conversion money to pay the taxes, it won't have made it into the Roth and you will owe taxes, and perhaps a penalty on the money that doesn't get converted.

All that said, with the markets down, if you are going to do a Roth conversion, this is a pretty good time to do it. (The account is probably worth less, thus you won't owe taxes on as much money as you would have last year.) We do recommend discussing this with a financial/tax advisor who knows the details of your case.
Wendy Weiss, Ph.D.:
expert info »
If you roll over your traditional IRA to a Roth IRA, you get a GREAT tax benefit when you retire, or start to withdraw your money. You do not have to pay taxes on the money that you withdraw [from the Roth IRA]. That is a great idea, since most of us will be watching every penny when they retire. So we will like to be able to look at our ROTH IRA and know that every penny will go to us and not Uncle Sam.

But Uncle Sam has to get paid some time. Since you get a tax deduction when you put your money into a Traditional IRA, you should probably expect to be taxed when you take your money out of a Traditional IRA and roll it over into a Roth IRA. Talk to an accountant to be sure, but I believe that you are taxed on the entire amount that you roll over into a Roth IRA, during the year you move it to a Roth.
Christina Gears:
expert info »
When you convert an IRA to a ROTH 100% of the IRA becomes taxable in the year you convert. If you are under 59 1/2, you do not pay the 10% federal penalty for the conversion.

[Editor’s Note: That is, 100% of the money you roll over becomes taxable in the year you roll it over.]
Gail V. Marquet:
expert info »
Yes, you would have to pay tax on the money rolled from a traditional IRA to a Roth. Taxes are not paid on monies in a traditional IRA until they are withdrawn. Conversely taxes are paid before money is invested in a Roth and those monies can be withdrawn tax free.
Bettye J. Banks:
expert info »
Your traditional IRA is based on BEFORE tax income and used to reduce your taxable income as you earn wages. This means that you pay less now, but you pay taxes on the income after you begin to receive distributions from it.

The Roth is based on AFTER tax earnings, so you do not have to pay taxes on the earnings, because you have already paid taxes on it [what you contributed]. Always consult an investment professional before making an investment decision.
Rosemary Ervin, CPA:
expert info »
Yes, when you roll to a Roth from a regular IRA, you pay income tax on the amount rolled to the ROTH. Thereafter, when you take the rolled amount and any earnings, there is no tax on the distribution. The government is willing to pass on the income by getting the principal up front.
Michael A. Masiello:
expert info »
Yes, first, taxes are due on the conversion from regular deductible IRA to a Roth. The thinking is you'll pay a lower tax today for never taxed benefit in the future. If you are eligible, and you expect your future tax rate, i.e. income, to be higher in the future, this is usually a good idea. Good Luck, Mike.