Convert Traditional IRA To Roth - Is It Possible?

So, you have a traditional IRA, huh? You have had this IRA for years and have always been very happy…until you saw the benefits of Roth IRAs. Roth IRAs came onto the financial market in 1997 and they were seen by many as an updated version of an IRA. Sure traditional IRAs still have their benefits to those who are planning for retirement but depending on personal finances and financial goals a person may opt for a Roth IRA over the traditional account. But, is it possible to convert traditional IRAs to Roth? And if so, how can you do it? Let’s look at a few of the loopholes within the IRS accounts.

The biggest obstacle most people encounter when attempting to switch from traditional to Roth is their own income. Yup, if you make too much gross income on a yearly basis you will be automatically dismissed in your request for a conversion. In fact, if you make over $100,000 per year (gross) then you will be automatically declined for a conversion. This $100,000 counts for you, your spouse and any other financial role players in your household. It does not matter if you try to file separate returns because married couples who file separate returns are automatically rejected as well!

The second obstacle that stops many people from converting traditional IRAs to Roth IRAs is the tax situation. When you make the switch you are automatically labeled as making a qualified withdrawal. A qualified withdrawal will allow you to make the conversion but you will have to pay income tax on the entire amount moved. If you have a significant amount in your tax free traditional IRA then making a move like this could hurt your finances quite a bit. Even those who are qualified to make the move often decline to just because they want to avoid the high fees and additional taxes.

Maybe, despite all of the restrictions, making the switch will be fruitful for you in the long run. Roth IRAs often provide you a tax ‘shelter’ for a much longer period of time so if you want this protection you should look into actually doing it. Here are a few of the different ways you can go ahead and make the conversion:

  • Direct transfers: You simply contact your IRA asset holder and let them know which account you wish to transfer to. Direct transfers are the most popular because of their ease and the fact the cash never goes through your hands.
  • Rollovers: With rollovers you, as the account holder are actually the one who the money goes through. Your asset holder closes your account and sends you the money, leaving you responsible for moving it to the Roth IRA.