Individual retirement accounts are investment accounts regulated by the Internal Revenue Service. IRAs provide various tax advantages and are intended to encourage long-term retirement savings. A rollover IRA is an IRA that has received assets from another qualified plan, such as another IRA. A Roth IRA shares some characteristics with a rollover IRA, except a Roth is funded with after-tax dollars. Thus, converting from a rollover IRA to a Roth IRA may have tax implications.
Step 1
Open a Roth IRA. Contact a bank or other financial institution and complete the required new account forms. Typically, you will have to provide personal information such as your name, address, date of birth and Social Security number. You'll also need to provide this information for any beneficiaries you select.
Step 2
Evaluate your tax situation. Roth IRA accounts are funded with after-tax dollars, meaning you have to pay tax on any contributions before they are deposited in a Roth. This includes rollover contributions as well. As the entire amount of your conversion is subject to ordinary income tax, this transaction may push you into a higher tax bracket. Particularly if you already have high income in other areas, you may wish to consult with a tax adviser before you proceed.
Step 3
Check for income limits on conversions. For all years up to 2010, when the IRS lifted the income restriction, you could not convert to a Roth IRA if you earned more $100,000. As tax legislation is subject to frequent change, these restrictions could be renewed at any time.
Step 4
Fill out an IRA distribution form. To convert your IRA, you will have to provide your rollover IRA custodian with information about the transfer, including the name of the receiving firm, your account name and number, and the assets you wish to convert. For the firm to correctly report your transaction to the IRS, you must inform the firm that this is a Roth conversion.
Step 5
Monitor your conversion. Check that all assets you asked to transfer are converted and that there are no residual assets left in your rollover IRA.
Step 6
File your taxes properly. You must report the amount of your conversion on line 15b of your Form 1040. The custodian of your rollover IRA will report the amount of your conversion to both you and the IRS on Form 1099-R.
Things You'll Need
- Rollover IRA
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