Companion blog post:
In this video, I share my screen as I complete my first Roth conversion at Fidelity. I also talk about the benefits of a Roth conversion and when it may be the right move for you.
The annual deadline to complete a Roth conversion is December 31st (Fidelity has a 4pm ET processing deadline if the date falls on a weekend).
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Fidelity Roth Conversion – Watch as I Convert $15,000 from a Traditional IRA to a Roth IRA
When it comes to retirement planning, one of the most important decisions to make is whether to convert a Traditional IRA to a Roth IRA. While both types of accounts offer tax-advantaged savings for retirement, they have different tax treatment when it comes to contributions and withdrawals.
In a Traditional IRA, contributions are typically made with pre-tax dollars, meaning that the account holder can deduct the contributions from their taxable income for the year. This allows the investments in the account to grow tax-deferred until withdrawals are made in retirement. However, withdrawals from a Traditional IRA are taxed as ordinary income.
On the other hand, a Roth IRA is funded with after-tax dollars, so contributions are not tax-deductible. However, the key benefit of a Roth IRA is that qualified withdrawals in retirement are tax-free, including any investment gains.
One way to take advantage of the tax benefits of a Roth IRA is through a Roth conversion. With a Roth conversion, an investor can move funds from a Traditional IRA to a Roth IRA, potentially allowing for tax-free growth and withdrawals in retirement.
In this article, we will explore the process of a Roth conversion using Fidelity as the custodian, and watch as I convert $15,000 from a Traditional IRA to a Roth IRA.
Step 1: Determine Eligibility and Potential Tax Implications
Before initiating a Roth conversion, it’s important to review the eligibility criteria and potential tax implications. For example, individuals with modified adjusted gross incomes (MAGI) above a certain threshold may not be eligible to make a direct Roth IRA contribution or convert a Traditional IRA to a Roth IRA.
Additionally, converting funds from a Traditional IRA to a Roth IRA is a taxable event, as the amount converted is added to your taxable income for the year. It’s crucial to understand the potential tax consequences and consult with a financial advisor or tax professional before proceeding with a Roth conversion.
Step 2: Initiate the Roth Conversion with Fidelity
Once eligibility and tax implications have been considered, the next step is to initiate the Roth conversion with Fidelity. This can typically be done through the Fidelity website or by contacting a Fidelity representative.
In my case, I logged into my Fidelity account, navigated to the Traditional IRA holding the funds I wanted to convert, and initiated the conversion process. Fidelity provided a straightforward online form to specify the amount to convert and the destination Roth IRA account.
Step 3: Review and Confirm the Conversion Details
After initiating the Roth conversion, it’s important to review the details and confirm that the information is accurate. This includes verifying the amount to be converted, the source and destination accounts, and any tax withholding preferences.
Fidelity provided a summary of the conversion details for review before I confirmed the transaction. Once confirmed, the Roth conversion was processed, and the funds were moved from my Traditional IRA to my Roth IRA.
Step 4: Monitor the Roth IRA and Plan for the Future
With the funds successfully converted to a Roth IRA, it’s essential to monitor the account and plan for the future. This includes reviewing the investment options within the Roth IRA, considering the potential for tax-free growth, and strategizing how to maximize the benefits of a Roth IRA in retirement.
In my case, I plan to review the investment options available within my Fidelity Roth IRA and consider a diversified approach to maximize potential growth while aligning with my retirement goals.
In conclusion, a Roth conversion offers the opportunity to potentially take advantage of tax-free growth and withdrawals in retirement. By understanding the process and potential implications, individuals can make informed decisions about whether a Roth conversion is suitable for their financial situation. With Fidelity as the custodian, the process of converting funds from a Traditional IRA to a Roth IRA was seamless and well-documented. As always, it’s important to consult with a financial advisor or tax professional to determine the best course of action based on individual circumstances.
Brief, clear & responsive for a heads up audience. You deserve more subscribers. I'm in
Thank you very much for the helpful video. It is good thing to come across your video since I plan to do Roth conversion in 2024 as I already retired last year. Please help me with the following questions. With the existing traditional IRA at work, one Traditional IRA at fidelity that was roll over from previous employer, and one existing fidelity ROTH account, does the pro rata rules apply when I roll over traditional IRA from work to fidelity IRA and then convert to ROTH? Or just simply pay tax based on my tax bracket. Does the 5 years rule still apply to each converted amount when the amount is converted to a Roth account existed more than 5 years and 60 years old, thanks.
What about the timing of paying the taxes on the conversion? If I do a conversion in January, 2024 and then don’t pay the tax until I file in April 2025, won’t there be a penalty? Will I need to pay the tax close to the time of the conversion to avoid a penalty?
This is good information. Just a quick question does this same process apply if you move 401k money from a previous employer to a Roth IRA account as far as taxes go etc?
What’s the max you can convert?
Great video. Can you do a Roth conversion and RMD same year?
You didn't mention the pro rata rules when converting traditional to Roth. Everyone should be aware of this headache. It can be avoided if you roll your traditional IRA into a 401k if you have one. Then do a backdoor Roth.
It's "RMD" and the age is changing to age 75. Also, i believe the tax consequences need to be paid in the same tax quarter that the conversion was made.
Thanks for the helpful video. One thing I didn't see mentioned: A Traditional IRA is typically invested in equity and bond funds. What actually transfers? Do you have to liquidate some or all of the investments to the IRA's core holding, with the transfer of that amount specified to the Roth occurring from that holding? I did not see any option in your example of directly transferring a specific investment (like and S&P 500 index fund) directly to the ROTH? Once the money moved to the Roth, you would then have to again purchase the desired equity or bond fund? Thanks
Thanks for the video. Really helpful as I wasn't sure what was past the "Tax withholding information" screen. I was worried it would have triggered a full conversion of my whole account. Fidelity should make a note or indicate that you can convert the full amount or some of the account. Anyway, your video cleared this up. Thank you. Lastly, I see you will invest the money after the conversion to FSKAX. Would you recommend investing the money even if you plan on using the money in 5 years after clearing the 10% tax penalty? What would you do with that money?