What Is a Roth IRA Conversion?
In a Roth IRA conversion, the account holder takes some or all of the balance in their traditional individual retirement account and converts that money to a Roth IRA. The money converted to a Roth IRA is taxable as ordinary income in the year the conversion is made. The exception is the value of any after-tax contributions made to the traditional IRA that are part of the amount converted.
Another possible type of a Roth IRA conversion might occur if you are leaving your employer. A traditional 401(k) account can be rolled over and converted to a Roth IRA. The tax rules described above will still apply. Depending upon the rules of both your 401(k) plan and those of the IRA custodian, an interim transfer to a traditional IRA may be required.
Once a Roth IRA conversion is completed, distributions from the account are tax-free as long as certain requirements are met.
In next blogpost, we will discuss in details how a Roth IRA conversion benefits you.