A rollover IRA is an individual retirement account that has previously received funds from another qualified plan, such as a 401k plan or another IRA. Like a rollover IRA, a Roth IRA is a long-term, tax-advantaged savings account, but contributions and distributions are treated differently between the accounts. Determining which type of account is better-suited for your investment needs may require the assistance of a financial adviser.
Step 1
Research the tax ramifications of your conversion. While rollover IRAs are funded with pre-tax dollars, you can only contribute after-tax dollars to a Roth IRA. If you are converting to a Roth IRA, therefore, you must pay ordinary income tax on the entire balance that you transfer. Depending on the size of your conversion, this may push you into a higher tax bracket, and you may have to withdraw from your Roth just to pay your tax liability.
Step 2
Check current conversion restrictions. As of 2010, there are no income restrictions preventing you from converting to a Roth IRA. However, for prior years you could not convert to a Roth if you had a modified adjusted gross income of more than $100,000. Tax law tends to change frequently, so consult the most recent edition of IRS Publication 590 to verify that you are eligible to convert.
Step 3
Open a Roth IRA. Contact a financial services firm, such as a bank or brokerage house, and tell them you want to open a Roth. You will have to complete new account paperwork with information such as your name, address, date of birth, Social Security number and investment experience. If you are converting to a Roth at the same institution that holds your rollover IRA, you may be able to simply change the designation on the account and avoid the new account opening paperwork.
Step 4
Complete an IRA distribution form. Your rollover IRA custodian will provide you with this form, which is required to authorize the firm to convert your assets to a Roth. Requested information will include the name of the receiving firm, your Roth account name and number, and the routing number of the receiving firm, which is an identifier ensuring that the funds reach the appropriate firm. In order to properly code the conversion for IRS purposes, you must enter the reason for your distribution on the form.
Step 5
Follow up on the conversion. Sometimes when accounts are converted or transferred, residual assets are left in the original account. Contact your rollover IRA custodian to verify that all assets have left the account.
Step 6
File your taxes correctly. Because Roth IRA conversions are fully taxable, you must report the amount of the transfer to the IRS when you file your annual tax return. Your rollover IRA custodian will provide you with Form 1099-R at year-end showing the amount of the conversion. Include this amount on line 15b of your Form 1040.
Things You'll Need
- Rollover IRA
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