Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.
Major benefits of a Roth IRA:
Things to Consider
Prior to making the decision to convert funds into a Roth IRA, consider the following:
It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.
An Early Roth IRA Conversion Tip
It's best to act early in the tax year if you want to roll funds into a Roth IRA. That's because an early move into a Roth typically gives you the option to re-convert your funds through October 15th of the following tax year. The IRS calls this process recharacterization.
Example: Sam converts $50,000 from a Traditional IRA to a Roth in January. By October, the Roth is worth only $40,000 because Sam's investments lost value. If Sam does nothing he will still pay taxes on $50,000 converted from his Traditional IRA in January. Instead Sam can recharacterize some or all of the funds back into a Traditional IRA and pay no taxes on the conversion.
Here are some things to consider with an early rollover to a Roth IRA:
Each person's situation is unique. Carefully review your options prior to acting.