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Converting to a Roth IRA

A Roth conversion occurs when you take savings from a Traditional IRA or employer-sponsored retirement plan — such as a 401(k), 403(b), or governmental 457(b) — and convert them to a Roth IRA. When converting your pre-tax savings, you’re including the converted amount as income on your taxes now to get the tax-free growth benefits of a Roth IRA later.

Key Benefits:

Roth IRAs offer a number of potential advantages over Traditional IRAs. While Traditional IRAs allow for tax-deferred growth of retirement assets, with taxes being due when distributions are taken, qualified Roth IRA withdrawals are tax-free, as long as you hold the Roth for at least five years and are at least age 59 1/2*. Withdrawals may be subject to a 10% IRS tax penalty if distributions are taken prior to age 59 1/2. Other features include:

  • With a Roth IRA, unlike Traditional IRAs, you are not required to begin taking distributions at age 70 1/2.
  • A Roth IRA can be used as an estate planning tool because the assets can be passed on tax-free to your heirs.
  • 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.
  • May not need the funds for retirement and may want to transfer them to your heirs.

Assess your situation with our Roth IRA Conversion Analyzer

Before converting there are a few things to consider:

  • 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  penalty free. The longer the assets in the Roth IRA can be left untouched, the greater the benefit of tax-free earnings accumulation.

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.

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, 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 an employer-sponsored retirement plan, such as a 401(k), 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 current tax-deferred assets in a Traditional IRA or employer-sponsored retirement plan, such as a 401(k), to a Roth IRA. 

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

In addition to Traditional IRAs, funds in qualified employer plans such as 401(k)s, 403(b)s, or governmental 457(b)s 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 withdrawn to pay taxes may be subject to the 10%  IRS penalty. Plus, those funds would no longer be growing tax-free within the Roth IRA. It’s recommended you use assets outside of retirement accounts to pay any taxes resulting from the conversion. 

When does it make sense to convert?

Generally, a Roth IRA conversion may make sense for you 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 in retirement.
  • Can pay the conversion taxes without using the retirement funds themselves.
  • May not need the funds for retirement and want to transfer them on to your heirs.

Assess your situation with our Roth IRA Conversion Analyzer tool.

Do I have to convert the entire amount in my Traditional IRA or employer-sponsored retirement plan?

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, each conversion has its own five-year waiting period to avoid the 10% penalty if under age 59 1/2.

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

Yes, you have the ability to re-characterize your conversion back to a Traditional IRA until October 15 of the year following the original conversion. Work with your tax advisor to determine if you need to file amended tax returns for the previous year.

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 IRA; instead the IRS 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 immediately 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 would apply. Please consult a tax advisor to see if this strategy would work for you.

Is there an early-withdrawal penalty on the conversion?

No, there is no early-withdrawal penalty on the amount converted.

When am I eligible for tax-free withdrawals?

To withdraw tax-free earnings, the Roth IRA must have been open for a minimum of five years and be withdrawn for one of the following reasons:

  • You are at least 59 1/2 years old
  • Disability or death
  • First-time home purchase ($10,000 lifetime limit)

Can my beneficiary withdraw the funds tax-free?

Yes, as long as it’s been five years since the conversion or the first annual contribution. This is one of the primary benefits of a Roth IRA, especially if heirs elect to take lifetime distributions.

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.

We’re here to help Request a Consultation

Call us 1-877-493-4727

*Death, disability or first-time homebuyer ($10,000 lifetime limit) are other exceptions.