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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
| 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.
How to Get Your IRA up and Running
-
COVID Hospitalization Rates See an Uptick As Winter Looms — The Kiplinger LetterThe Kiplinger Letter A new Omicron booster is available, but the elderly are still at risk and winter is right around the corner.
-
Will Weight-Loss Drugs Spike Medicare Costs?: The Kiplinger LetterEconomic Forecasts Lawmakers are trying to get weight-loss drugs like Wegovy covered by Medicare. Long-term savings are possible, but it could cost the program $27 billion.
-
Greenland, U.S. Plans to Boost Tourist Economy: Kiplinger Economic ForecastsEconomic Forecasts A U.S. congressional effort could see some Canadian visitors get longer stays, meanwhile, Greenland bids to be the next vacation hotspot.
-
Medicare Drug Price Negotiations Latest: Kiplinger Economic ForecastsEconomic Forecasts Medicare drug price negotiations: Early signs have emerged of how these key talks will be handled.
-
Forces That Affect Your Estate Planretirement From probate and ownership division to the taxing arm of Uncle Sam, here are four things that can influence what happens to your belongings.
-
What to Ask Before Buying an Annuityinsurance If more people understood these confusing products, fewer probably would be sold. Find out what you need to know.
-
Tapping Your IRA in Retirementretirement You can cash in your IRA all at once, but doing so could subject you to an enormous tax bill. You'll probably do better tax-wise by taking out as little as necessary each year.
-
Make a Plan for Your Retirement Savingsretirement The first step to effectively using your 401(k) is to assess your retirement needs.
