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.
Laura Adams, MBA
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?
Answer. 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!
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.