Conversion from traditional to a Roth IRA (p5)

Conversions are not limited to IRAs, transferring funds from a traditional IRA to a Roth IRA it's called a conversion.

There is no limit on the amount that can be converted or income restrictions on who can complete a conversion.

Common reasons for conversions

1. In a traditional IRA, your taxed on the initial investment and any gains when you withdraw it. With a Roth IRA, the account holder can withdraw funds anytime but taxes apply if they haven't reached age 59 1/2 or they've only had the account for less than 5 years.

2. Traditional IRAs require the owner to take minimum annual distributions when they reach age 72 (73 if they reach age 72 after December 31st). Roth IRAs don't have a distribution requirement during the owner's lifetime.

3. The beneficiary of an inherited traditional IRA will pay tax on most distributions, while the beneficiary of a Roth IRA won't.

The taxation of a conversion is similar to the tax on a rollover from a qualified retirement plan to a Roth IRA.

Like rollovers, funds in a traditional IRA that has never been taxed will be included in taxable income when the account is converted to a Roth IRA. However, if the conversion occurs before the owner reaches age 59 and a half, then the 10% penalty doesn't apply.

Any portion of a traditional IRA that's a non deductible contribution won't be included in taxable income when the account is converted. To ensure accurate reporting, individuals must complete form 8606 when making a non-deductible contribution and they must keep track of those contributions.

https://www.irs.gov/forms-pubs/about-form-8606