Roth conversions

How to contribute to a traditional IRA and convert it into a Roth IRA

Table of Contents

Getting started

How to Make a Roth Conversion

In the financial industry, when individuals want to transfer all or part of a Traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA, we tend to call it a “Roth conversion.” Why the name? Well, a “Roth conversion” has a specific set of uses that help enable people to manage their taxes more effectively. Since Betterment is not a tax advisor, we can’t provide actual tax advice on how a “Roth conversion” would affect your specific tax situation, but there are generally three main benefits people ...

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What are the advantages of a Roth IRA conversion?

You generally won’t have to pay taxes when you withdraw money at retirement, as long as you’ve had the account for more than five years and are either over 59½, disabled, or you’re a homebuyer using up to $10,000 on your first home. If you think your tax rate will be the same or higher than your current rate when you withdraw your money, paying taxes now could be beneficial. The tax-free distributions in retirement may help reduce the taxes on other income such as Social Security, and may also ...

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Why consider a Roth IRA Conversion?

Roth IRA rules can appear limiting at first glance—but you may be able to fund a Roth by rolling over funds from another account. Say you want to fund a Roth IRA to take advantage of those tax-free withdrawals in retirement, but your income is too high to contribute directly to a Roth IRA. For 2020, this would be the case if your income is over $139,000 if you’re single and $206,000 if you’re married filing jointly. For 2021, this would be the case if your income is over $140,000 if you’re ...

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What are the disadvantages of a Roth IRA conversion?

You may have to pay income taxes now on conversion amounts that were previously deducted from your income. Betterment will not withhold these funds for you. The taxable portion of a converted amount will be added to your adjusted gross income for the year, and could potentially increase your tax bracket overall. Taxpayers with incomes or an adjustable gross income (AGI) over $200,000 who file individually, or $250,000 for married couples filing jointly, could be subject to a 3.8% tax on income ...

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What is a backdoor Roth IRA conversion?

The so-called backdoor Roth is one way one can avoid a big tax bill when you earn more than the income limit for a Roth. In that case, if you’re also covered by an employer retirement plan like a 401(k), you likely wouldn’t be able to fund a deductible IRA, because of IRS rules. But you could contribute to a nondeductible IRA (regardless of how high your income is), and then convert to a Roth. When you contribute to a nondeductible IRA, you’re effectively depositing after-tax dollars, so you’d ...

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How it works

How to complete a SEP IRA to Roth IRA conversion?

If you’d like to convert your SEP IRA to a Roth IRA, we can help you with that, although there are a few additional steps involved. First, we will assist you with rolling your SEP IRA contributions into a Traditional IRA. Note that the rollover doesn’t change the type of the contributions you made, it just changes the account they are housed within. To roll your SEP IRA funds into a Traditional IRA, please email us with your request and we will complete the rollover from our end. There is no ...

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Required Minimum Distributions and Roth conversions

If you are over a certain age, you must take your Required Minimum Distribution (RMD) before you can convert your Traditional IRA to a Roth IRA. The conversion process on our website includes a step to do this. Note that IRS rules allow you to take your total RMD from one or more IRA accounts, including those not held at Betterment. Therefore, you can choose to take your RMD from Betterment or from a different IRA account. The IRS is not kind to people who do not take their RMD on time. There ...

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How to do a Roth IRA conversion?

We recognize that many investors are interested in this technique, so we’ve created a quick process that allows an investor to authorize a Roth conversion online in less than a minute. Log in to your account on a web browser. Click on Settings in the menu on the left-hand side of the page. Click the Accounts tab at the top of the page. Find your Traditional IRA and click the 3 dots that appear off to the right. Choose the option that says “Convert IRA to Roth.” You’ll have the option to convert ...

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What Michigan residents should know about Roth conversions

As a Michigan resident, if you want to convert or withdraw from your IRA, the State of Michigan requires you to fill out Form MI W4P. You must check Box 1 to state that you opt out of state tax withholding. Return the form to us at support@betterment.com. If you download the free Adobe Reader, you can fill it out and sign it electronically (and easily). This article is intended for educational purposes only. The information provided is educational in nature, and is not intended to be relied ...

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