Rolling a Traditional IRA into a Roth IRA - What are the tax implications?

When you decide to roll over your Traditional IRA to a Roth, you will need to count the money as part of your income. Income is reported as the value of the funds you are rolling over on the day you convert. So, if you have seen some gains, you will be taxed on them as well.

Not only will you pay taxes on the amount you roll over, but you might also be bumped up into another tax bracket. Realize that, since the income is reported on your tax form, you can take deductions and credits to help reduce the blow (although in some cases the income puts you at phase out levels for some tax breaks).

In order to spread out the impact, some investors choose to roll over parts of their IRA a little at a time, spacing it out. You don’t have to roll over everything all at once, though.

Make sure that you complete the rollover within the designated time frame, though, or you could end up being subject to a 10% penalty for early withdrawal.

The best way to accomplish a rollover is to use the help of a trustee to trustee transfer (making sure to designate that you are rolling over the funds) so that the money goes straight from one custodian to another. If you have to withdraw the money, and then roll it over yourself, it can be a good idea to get help from a professional to make sure you follow the steps to avoid a 10% penalty from the IRS.

Does a Roth IRA Conversion Make Sense for You?
Before you roll your money over, consider whether or not a conversion makes sense to you. Many investors choose to roll over to a Roth because the money in a Roth grows tax-free. You may pay taxes now, but when you withdraw - if you withdraw since there is no requirement while you are alive - you don’t have to pay taxes  on amount withdrawn.