What Is the Tax on a Roth IRA Conversion?
If you're considering doing a Roth IRA conversion, make sure you understand what the tax consequences will be.
Q. I want to convert my traditional IRA into a Roth IRA, but I’m not sure what the tax will be. Do I have to pay tax on the entire IRA value or just on my earnings over the years?
A. The entire amount that you convert from a traditional IRA into a Roth IRA will be taxable (except for any nondeductible contributions, because those were already taxed). For instance, if your traditional IRA is worth $10,000 and you want to convert the full amount into a Roth, you’ll pay ordinary income tax on $10,000. There are no taxes for capital gains or losses on a Roth conversion.
Once you pay income tax on the value of your Roth conversion, you’ll never be taxed again. If your $10,000 Roth IRA grows into a healthy nest egg that’s worth $150,000, you’ll get to take withdrawals that are completely tax-free once you reach the official retirement age of 59½. That means you’d avoid paying tax on $140,000 of income, which is a really sweet retirement present!
Other Links You Might Like:
Credit Score Survival Kit – a free multimedia video tutorial with 3 strategies to raise your credit scores!
Get the Money Girl Book!
Looking for more money advice or a great gift? Pick up a copy (or several!) of Money Girl’s Smart Moves to Grow Rich. It tells you what you really need to know about money without bogging you down with what you don’t. Get the ebook version or paperback at your favorite book seller today!
Contact Money Girl!