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IRAs

Converting Your Traditional IRA to a Roth

You won't be penalized, but you will owe taxes. Here's how to soften the blow.

If your adjusted gross income is $100,000 or less, you can convert your old-style IRA to a Roth so all future earnings inside the account will be tax-free.

However, if you are married and file a separate return, you are forbidden to covert an old IRA to a Roth.

Although rolling old IRA money into a Roth sounds great, there's a catch: To do so, you have to pay tax on the amount rolled over -- except to the extent that you have made nondeductible contributions to the old IRA.

Say, for example, that your IRA holds $100,000, all of it from deductible contributions and tax-deferred earnings. To convert that IRA to a Roth, you'd have to report and pay tax on that $100,000 in your top bracket. Ouch!

If you can pay the tax bill without tapping your IRA funds, switching to a Roth account can put you far ahead of the game because it lets you keep more money in the tax shelter.

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Warning!
There's a big catch to using IRA money to pay the tax on a Roth conversion. If you're younger than 59½ you'll probably have to pay a 10% and possibly even a 20% penalty on the amount that's not rolled over into the Roth or rolled into a Roth and then pulled out to pay the tax.

Converting to a Roth is not an all-or-nothing deal, though. If you have several old IRAs, you may convert one or more to Roths and maintain the others; in other words, convert smaller sums each year and pay only the tax on those sums.

Use our conversion worksheet to see if a switch makes sense for you, and read Roth or Deductible IRA? for more information.

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