How to Convert IRA to Roth

Having a hard time deciding whether to convert IRA to Roth or not?

For simple conclusion, a Roth IRA conversion may make sense if the account grows enough in the future to make up for the income tax bill you face when you convert IRA to Roth. There are three factors you need to consider to help you decide.

• Taxes. If you expect to be in higher income tax bracket when you retire, a Roth conversion has extra appeal. If you want to leave your money to your children, a Roth conversion will benefit them because there may be no federal taxes on that money.
• Time. You may need a long time frame before you need the money. The longer it is until retirement, the better deal the Roth conversion becomes. In that case, the ability to take money out of an Roth IRA account tax-free will be worth more than the ability to take a tax deduction today.
• Cost. You should have enough money outside your retirement accounts to cover the cost of the taxes you'll need to pay. If not, a Roth conversion may not be a good move.

Take your time. It's all about your money. You are just trying to save more money for your retirement. Uncle Sam wants to help you.

Here are general steps you need to follow in the Roth conversion process.

• Step 1. Eligibility. You'll qualify for converting to Roth IRA as long as your modified adjusted gross income (MAGI) is not greater than $100,000. If your filing status is married filing separately, you can convert only if you've lived apart from your spouse for the entire taxable year. However, the limitations will be removed in 2010.
• Step 2. Method. There are three different ways to convert to a Roth. You can rollover it or transfer to a new trustee or transfer to a new account provided by the same trustee.
• Step 3. Tax implications. As I mentioned above, all or some of your conversion could be subject to federal income taxes. The conversion amount is not included in the MAGI calculation to determine eligibility to convert. However, it may affect your tax bracket to calculate the income taxes for the conversion amount.
• Step 4. Recharacterization. What if you are not satisfied with your conversion? You can undo it. And when you think a Roth makes sense for you later, you can reconvert it.