Question: Can I convert a traditional IRA to a Roth IRA without being taxed?
Answer: You may convert all or part of your traditional IRA to a Roth Conversion IRA provided your adjusted gross income (AGI) is less than $100,000 in the year you convert, whether you're single or married. However, if you're married and file your taxes separately from your spouse, you're not eligible to convert.
While conversions are penalty-free, you'll be taxed on any deductible contributions and earnings you convert to a Roth IRA. These taxes will be due in the year you convert.
If you convert and then determine you were not eligible under the income limitations, you can move from a Roth Conversion IRA back to a traditional IRA, without penalty, until the day you file your tax return for the year you converted.
Once you convert from a traditional IRA to a Roth Conversion IRA, your investment and any accumulated earnings will grow free of federal income taxes. However, you could be subject to taxes and a penalty if you withdraw any earnings before the Roth Conversion IRA is at least five years and you are at least age 59-1/2.
Douglas C. Lockwood, BS, MBA, JD, CFP writes on behalf of American Century Investments. For more information and financial guidance, visit American Century.
