For many taxpayers, investing in a Roth IRA may provide significantly more after-tax income in retirement than from either a deductible or non-deductible Traditional IRA. As a result, some investors choose to convert money from their Traditional IRAs to Roth IRAs.

Historically, Roth IRA conversions were out of reach for investors with higher incomes. As of January 1, 2010, that changed - learn more:

Note to Hawaii tax payers: Residents of Hawaii who convert to a Roth IRA in 2010 must report the income in 2010 for state tax purposes. The taxes may not be spread across tax years 2011 and 2012. Visit http://hawaii.gov/tax/ Link to External Site or talk to your tax advisor for more information.

Conversions

  • You may convert all or part of your Traditional IRA to a Roth IRA without being subject to the 10% early withdrawal penalty, provided your Modified Adjusted Gross Income (MAGI)3-whether filing a single or joint tax return-in the year you convert is $100,000 or less excluding the conversion amount. If you are age 70½ or older and are taking required minimum distributions from your Traditional IRA, you don't have to include those distributions as income when determining whether you can convert to a Roth IRA. Starting in the year 2010, all taxpayers can convert their Traditional IRAs to Roth IRAs, regardless of their MAGI3.
  • Married taxpayers who file separate tax returns are not eligible to convert a Traditional IRA to a Roth IRA until the year 2010.
  • You will owe taxes on any contributions and earnings not previously taxed. Taxes will be due when you file your income tax return for the year in which you converted. If you convert in the year 2010, you won't be required to pay any taxes on the conversion that year. You will be allowed to pay half the taxes in 2011 and the other half in 2012.
  • While conversions are penalty free, the amount you convert that has not previously been taxed must be included as taxable income and could potentially move you into a higher tax bracket. If you convert and then determine you were not eligible under the income limitations, you can move from a Roth IRA back to a Traditional IRA, without penalty, until you file your federal income tax return for the year in which the conversion originally took place.

Earnings and Withdrawals

  • Once you convert from a Traditional IRA to a Roth IRA, your new IRA investment and any accumulated earnings will grow free of federal income taxes. You may withdraw earnings free of federal income tax and penalty beginning at age 59½ if the account is at least five years old.1
  • Minimum distributions are not required at any age. However, if your estate includes Roth IRA assets after your death, your beneficiaries will have to take required minimum distributions.1, 2
  • IRA Penalty-free distributions for special purposes may be permitted prior to retirement.1

1State and local taxes may apply.
2Estate tax may apply.
3Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) with standard deductions included.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.