Overview

Key Benefits:

Roth IRAs offer a number of potential advantages over Traditional IRAs. Traditional IRAs allow for tax-deferred growth of retirement assets, with ordinary income being due on the taxable amount of the distributions. Distributions of Roth IRA earnings are tax-free, as long as the Roth IRA has been open for more than five years and you are at least age 59 1/2, or as a result of your disability or using the first-time homebuyer exception or taken by your beneficiaries due to your death. Distributions may be subject to a 10% additional tax if taken prior to age 59 1/2. Other features include:

• With a Roth IRA, unlike Traditional IRAs, you do not have to take required minimum distributions (RMDs) during your lifetime.
• A Roth IRA can be used as an estate planning tool because your beneficiaries can inherit the Roth IRA tax-free.
• Tax diversification of retirement assets allows for more flexibility to manage taxable income in retirement.

Generally, a Roth IRA conversion makes sense if you:

• Won’t need the converted Roth funds for at least five years.
• Expect to be in the same or a higher tax bracket during retirement.
• Can pay the conversion taxes without using the retirement funds themselves.
• You live in a state with no income tax but will retire to a state that has income tax.
  
• May not need the funds for retirement and may want to transfer them to your beneficiaries.

A Roth IRA conversion may not be appropriate if you:

• Are not sure what your tax situation will be like this year because once you convert you cannot recharacterize or "undo" the conversion.
• Have to deplete other assets to pay the taxes due on the conversion.
• Are pushed into a higher tax bracket due to the amount you convert.
• Will be in a lower tax bracket in retirement.
• Will be relocating to a state with no or lower state income tax.
• Are wanting to convert your RMD because RMDs cannot be converted. You must first satisfy your RMD and then complete a Roth conversion.

Before converting there are a few things to consider:

• You cannot recharacterize. Understand your tax situation and ability to pay for the conversion because a Roth conversion cannot be recharacterized.
• The availability of funds to pay income taxes. The benefits of a conversion are increased if the income taxes due can be paid out of non-retirement assets. 
  • To help manage your tax liability, you may choose to convert just a portion of your assets. There is no limit to the number of conversions you can do, so you may convert smaller amounts over several years.
• Your time horizon. Generally, if you will need the funds within the next five years, a Roth IRA is not a good choice. This is because a five-year waiting period is required if you are under age 59 1/2 before you can distribute the converted amount without owing the 10% additional tax. The longer the assets in the Roth IRA can be left untouched, the greater the benefit of tax-free earnings potentially accumulating.

Eligibility

Anyone is eligible to convert regardless of their income or tax filing status.

To discuss the potential advantages of Roth IRAs and Roth IRA conversions with a Wells Fargo retirement professional, call 1-877-493-4727. To determine whether a Roth IRA conversion is right for you, talk to your tax advisor.

How To Convert

Converting to a Roth IRA may seem like a lot of work, but we can make it easy. Just call a Wells Fargo retirement professional at 1-877-493-4727, and we’ll work with you throughout the conversion process.

Here’s what to expect:

Step 1 – Contact a Wells Fargo retirement professional at 1-877-493-4727 to initiate your conversion request and get an overview of the process.

Step 2 – Our team will help you open a new Roth IRA account if you don't already have one, fill out the appropriate paperwork, and answer any questions you may have.

Step 3 – An account form will be sent to you (emailed, faxed, or mailed) to initiate your conversion.

• Whether you’re converting a Wells Fargo Traditional IRA, an IRA from another financial institution, or a qualified employer sponsored retirement plan (QRP) such as 401(k), 403(b), or governmental 457(b), we’ll walk you through the process to make sure all of your questions are answered.

Step 4 – Return the paperwork (email, fax, or mail) to complete your request.

Frequently asked questions about Roth IRA conversion

What is a Roth conversion?

A Roth conversion is the process of repositioning your assets in a Traditional IRA or an eligible distribution from your qualified employer sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b) to a Roth IRA. 

What type of retirement accounts can I convert to a Roth?

In addition to Traditional IRAs, funds in QRPs that are eligible to be rolled over may be converted to a Roth IRA.

Will I owe taxes on my conversion?

A conversion of after-tax amounts will not be subject to income tax.  Any before-tax portion converted will be included in your gross income for the year.

Can I pay the taxes from my conversion from the retirement funds?

While it is possible, it generally does not make sense to use the retirement assets to pay the taxes. If you are under age 59 1/2, the amount distributed to pay taxes may be subject to an IRS 10% additional tax for early or pre-59 1/2 distributions. Plus, those funds would no longer be potentially growing tax-free within the Roth IRA. It’s suggested you use assets outside of retirement accounts to pay any taxes resulting from the conversion. 

Do I have to convert the entire amount in my Traditional IRA or QRP?

No. You may convert just a portion of your assets, and there is no limit to the number of conversions. To help manage the taxes due on each conversion, you may convert smaller amounts over several years. Keep in mind, if you want to take a distribution, each conversion has its own five-year waiting period to avoid the 10% additional tax if you are under age 59 1/2.

What if I change my mind? Can I undo my conversion?

No, a Roth conversion cannot be recharacterized.

I have after-tax contributions in my Traditional IRA, can I convert just that portion to a Roth?

No, you cannot convert just the after-tax dollars within your Traditional IRA; instead the Internal Revenue Code requires that you follow the pro-rata rule.  In simplest terms the pro-rata rule is used to determine how much of a distribution or conversion is taxable when you have both after-tax and before-tax dollars in any of your Traditional, SEP and/or SIMPLE IRAs.  That means each distribution from the account contains some portion of before-tax and after-tax money. Your tax advisor can help you with this calculation.

Are the income eligibility limits still in place to make an annual contribution to a Roth IRA?

Yes. The income limits for annual contributions are still in effect, so it’s possible to take advantage of a Roth conversion but not be eligible to make an annual contribution. Since there are no income eligibility limits for conversions, however, one common strategy is to make a non-deductible contribution to a Traditional IRA then convert it to a Roth IRA.  This may not be an appropriate strategy if you have other Traditional, SEP, or SIMPLE IRA balances, as the pro-rata rule (see above) would apply. Please consult a tax advisor to see if this strategy would work for you.

Is there an early distribution tax on the conversion?

No, there is no additional 10% tax on the amount converted. If you take a distribution, or elect tax withholding to pay for the taxes, and are under age 59 1/2, you may owe the 10% additional tax on the portion not converted.

Is there a deadline to convert?

Yes, the deadline is December 31 of the current year. A conversion of after-tax amounts is not included in gross income. Any before-tax portion converted will be included in your gross income for the conversion tax year.

When am I eligible for tax-free distributions?

Earnings are tax-free if the Roth IRA has been open for more than five years and:

• You are at least 59 1/2 years old, or
• You are disabled, or
• You are using the first-time homebuyer exception ($10,000 lifetime limit), or
• Your beneficiaries are taking distributions due to your death

Can my beneficiary distribute the funds tax-free?

Yes, as long as it’s been more than five years since the first tax year the Roth was funded by either a conversion or an annual contribution.

Where can I find more information on Roth conversions?

Consult with your tax advisor for more information. Call 1-877-493-4727 to speak to a Wells Fargo retirement professional today.