Can I transfer money from a Traditional IRA to a Roth IRA?[ Edited ]
I have both a Traditional IRA and a Roth. Can I transfer monies from the IRA to the Roth this year as I will be 701/2 in 2014?
In short – yes, you can move money from a traditional IRA to a Roth. What you’re asking about is called a Roth conversion and all IRA owners are permitted to do them. You should know though that your age is not a factor for this particular transaction. You should also know that you can’t satisfy your distribution requirement with a conversion. Let’s briefly look at how the two concepts are different and what happens (and doesn’t) when you connect them.
As we’ve outlined in other posts, once you turn age 70 ½, the IRS requires that you begin taking annual withdrawals from your pre-tax IRAs. These are called Required Minimum Distributions (RMDs). The amount you have to withdrawal is calculated by taking your pre-tax IRA balance(s) as of December 31st of the previous year and dividing it (them) by a factor found in a table in IRS Publication 590. The factor is based on the age you’ll be turning in the withdrawal year and each year the factor gets smaller, thereby causing you to have to withdrawal a larger and larger percentage each year. Now let’s move to a brief discussion of Roth conversions.
Though it can have an impact on your RMD (more on that in a minute), converting all or part of a pre-tax IRA to a Roth IRA is a completely separate category of IRA transaction from an RMD. In a conversion, the IRA owner moves money from the tax-deferred status of a pre-tax IRA to the potentially tax-free status of a Roth IRA. Because no taxes have ever been paid on the pre-tax account, the conversion transaction is taxable at ordinary income tax rates. For example, if you did a $10,000 Roth conversion, the income tax implications will be as though you went out and earned an additional $10,000 from working. The conversion amount will be added to your other income sources and will be taxed accordingly. Typically IRA owners will initiate a Roth conversion if they think their tax bill on the conversion will be lower than if they just left the money in the traditional IRA and paid taxes later upon withdrawal – either when required by the IRS or on their own time table. As an aside, Roth IRAs do not have RMD requirements.
Putting the two together
Finally, let’s see what happens (and doesn’t) when you put these two concepts together. To repeat what I stated at the beginning of my response, it’s important to understand that you can’t satisfy your RMD requirement with a Roth conversion. For whatever reason, the IRS doesn’t permit that. Even though both transactions are taxable, your RMD can’t be put into a Roth IRA. One potential upside of a Roth conversion though is that doing one will reduce your IRA balance and consequently could reduce your RMD for the following year. Having said that, you’ll still have to pay taxes on the conversion so it may not provide that much benefit depending on your situation.
In the end, it’s typically advisable to consult with a CPA or other qualified income tax advisor as you step into the world of RMDs and Roth conversions. The penalties for doing things wrong in this space can be substantial so you’ll want to make sure you’re not accidentally stepping into harm’s way with the IRS.
Thanks so much for your question. I hope this helps and I wish you all the best!