Roth IRA Conversions

• The IRS permits Roth IRA conversions for any taxpayer regardless of income. You can perform a conversion through a transfer or a rollover. Generally, a transfer offers fewer headaches because the money goes straight from your traditional IRA to your Roth IRA without it being paid to you in the middle. However, when you make a Roth IRA conversion, you'll have to pay taxes on at least a portion of the conversion.
  
  

Impact of Non-Deductible Contributions

• If you have non-deductible contributions in your traditional IRA, you do not have to pay income taxes on them when you make a conversion to a Roth IRA. If you convert the entire traditional IRA, you can easily tell how much of the IRA conversion is made up of non-deductible contributions. If, on the other hand, you convert part of your account, you only convert an equivalent part of your non-deductible contributions. For example, if 62 percent of your traditional IRA's value is from non-deductible contributions, you have to figure 62 percent of your IRA conversion to find the non-taxable portion.
  
  

Advantages of Converting

• If you were to leave your money in a traditional IRA instead of converting it to a Roth IRA, you would still be able to remove the non-deductible contributions from the traditional IRA tax-free at retirement. All your earnings on those contributions, however, count as taxable income when you take the distributions. When you make the conversion to a Roth IRA, you do have to pay income taxes on the earnings that have already accumulated. However, any future earnings after the conversion come out tax-free.
  
  

Tax Filing Forms

• When you convert to a Roth IRA from a traditional IRA, you have to complete extra income tax forms to verify your conversion to the IRS. First, to figure the portion of your conversion that you do not have to pay taxes on, complete Form 8606. Next, report the total amount of your conversion as a non-taxable IRA distribution and the taxable portion, as determined by Form 8606, as a taxable IRA distribution. If you had any money withheld from the conversion for income taxes, add that amount to your federal income tax withholding on line 61.