How is a Roth IRA Conversion Taxed?
Money Girl has the secret to securing a tax-free next egg for your retirement
Laura Adams, MBA
Question: I want to convert my traditional IRA into a Roth IRA, but I’m not sure about the tax consequences. Will the government tax the value of the entire IRA or just my earnings on what I contributed 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 taxes on the value of your Roth conversion, you’ll never be taxed on that money, or its growth, 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 would avoid paying tax on $140,000 of income, which is a 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.