Roth IRA conversion

Open a Roth IRA and take advantage of after-tax benefits as you save for retirement.

A Roth IRA conversion lets you move some or all of your retirement savings from a Traditional IRA, Rollover IRA, SEP-IRA, SIMPLE IRA, or 401(k) into a Roth IRA. There are no age limits to convert, and as of January 1, 2010, the IRS eliminated Roth IRA conversion income restrictions, allowing you to start taking advantage of unique Roth IRA benefits even if your current income disqualifies you from making additional contributions after converting.

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Why should I consider a Roth IRA conversion?

Although you will have to pay current income tax on your Roth IRA conversion amount, moving your money can still be advantageous if you:

Think you'll be in the same or higher tax bracket when you withdraw.
Won't need the converted funds for at least five years.
Can pay the conversion tax in cash.
Want to leave a tax-free financial legacy to your heirs.

The decision to initiate a Roth IRA conversion depends on your personal and financial situation, and should factor in your potential for a greater ending portfolio value, your estate planning goals, and your tax-risk diversification options. Answer a few quick questions to see whether converting is right for you, and get tailored next steps.

To get a better picture of the unique advantages that a Roth IRA offers, check out our Roth IRA vs. Traditional IRA infographic.

Common questions

How do I initiate a Roth IRA conversion?

If you have a non-Roth IRA at Schwab, call a Schwab investment professional at 866-855-5635 to start the conversion process.

If you have a non-Roth IRA or a 401(k) somewhere other than Schwab, you have two options:

Transfer your non-Roth IRA or your 401(k) to an IRA at Schwab. Once the transfer is complete, you can initiate the conversion to a Roth IRA.
Convert your non-Roth IRA or your 401(k) to a Roth IRA while it is still being held at the other institution. Once the conversion is complete, you can start the transfer to Schwab.

What are the federal income tax implications of a Roth IRA conversion?

You will be responsible for paying income taxes on any funds you convert, aside from prior after-tax contributions. Note that even if you want to do a full conversion of your traditional assets to a Roth IRA, you don't have to do it all at once. You can consider doing a partial conversion if:

Reporting an entire conversion will bump you into a substantially higher tax bracket. Keep in mind that if you only get bumped up slightly, say, from 25% to 28%, the conversion benefits might still outweigh the difference in income tax.
You don't have enough cash available outside your retirement account to pay the taxes for a full conversion. It's important to pay with non-IRA assets, because you can incur a 10% early distribution penalty if you're under 59½, and you will lose the benefits of tax-free growth on the amount you take out. The fee you pay could very well eliminate the advantage of converting in the first place.

If you do convert to a Roth IRA, you'll need to complete IRS Form 8606 to report your "basis" (if any) in your Traditional IRA, and to report your taxable conversion income to the IRS.

Do I need to pay taxes on non-Roth IRA gains when I convert to a Roth IRA?

Yes. When you convert to a Roth IRA, you must pay taxes on the amount converted from pre-tax contributions, plus any investment gains. If you've made nondeductible contributions to your non-Roth IRA in the past, you can't pick and choose which portion of the non-Roth IRA funds you want to convert to a Roth.

The IRS looks at all assets within a non-Roth IRA as a whole when it comes to distributions, including Roth conversions. In accordance with the aggregation rule, Traditional IRA balances are combined so that the amount converted consists of a prorated portion of taxable and nontaxable money.

How can a Roth IRA conversion be beneficial as an estate planning tool?

Unlike a Traditional IRA, a Roth IRA doesn't require a person age 72 or over to take minimum distributions, which means your account can continue to grow tax-free until you pass it on to your heirs. A spouse inheriting a Roth IRA will also not be required to take minimum distributions. Because you pay the conversion tax up front, you also eliminate the income tax your heirs would otherwise have to pay on withdrawals.

Converting to a Roth IRA will reduce your taxable estate by the amount of income tax you pay to convert. The Roth IRA balance will still be included in your taxable estate.

Can I put my converted assets into an existing Roth IRA?

You should be able to convert all or part of your eligible retirement assets to an existing Roth IRA. Check with a Schwab investment professional or your account provider.

Will I need to sell and convert to cash before converting to a Roth IRA?

No. You can convert your eligible retirement assets directly into a Roth IRA without going to cash investments first.

Do I need to take a Required Minimum Distribution (RMD) before converting to a Roth IRA?

If an RMD is required for a given year (including the year you reach the age of 72), you'll need to withdraw the mandatory amount before converting any remaining account assets to a Roth. The RMD that you withdraw from a Traditional, Rollover, SEP, or SIMPLE IRA cannot be converted to a Roth IRA or left in the original account.

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This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager. Depending on the type of account you have, there are different rules for withdrawals, penalties, and distributions. Please understand these before opening your account.

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