Merging a Rollover IRA to a Roth IRA
Summary of User’s Problem and Solutions:
- The main problem reported by the user, Sheldon, was whether it is possible to merge two accounts into one Roth IRA.
- Fidelity confirmed that merging a Rollover IRA into a Roth IRA is possible through a process called Roth conversion, which can be completed online if both accounts are at Fidelity.
- It was emphasized that Roth conversions are taxable events, and users should consider consulting a tax professional to understand the implications for their specific tax situation.
- Sheldon was informed about the importance of completing Required Minimum Distributions (RMDs) before converting and that converted assets must remain in the Roth IRA for at least five years to avoid penalties.
- Fidelity provided a step-by-step guide for initiating the transfer online and reminded that the deadline for conversions is December 31st of the calendar year.
Here’s the full thread
Was wonder if it was possible to merge these two account into one because I just want to have one account being a “ROTH IRA”
Thanks for reaching out to us, @sheldon!
It is possible, but there are a couple of things to keep in mind.
Transferring assets from a Rollover IRA to a Roth IRA is known as a Roth conversion and can be done on the website in a few steps if both accounts are held here at Fidelity.
It’s important to consider that Roth Conversions are taxable events and are typically taxed at your ordinary income rate. You can learn more about how this may affect your personal tax situation in the link provided below. If you have any other questions about how this might impact your specific tax situation, we recommend reaching out to a tax professional.
Roth Conversion Tax Information: https://www.fidelity.com/tax-information/tax-topics/roth-conversion
Additionally, when converting a pre-tax IRA, keep in mind the following:
• If you are required to take a Required Minimum Distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA
• RMD amounts are not eligible to convert to a Roth IRA
• Generally, converted assets in the Roth IRA must remain there for at least five years to avoid potential penalties and taxes
• A distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death
• RMD rules do not apply to Roth IRA original owners
If you wish to proceed, then the online transfer feature will give you the choice to transfer cash or securities in kind. Converting shares are valued at the market close on the day they are processed if the transfer occurs before 4:00 p.m., ET.
You can start a transfer by following the steps below:
1. Select “Accounts & Trade,” then “Transfers”
2. Select “Deposit, withdraw, or transfer money”
3. Follow the steps to initiate the transfer
One final tidbit: the deadline for Roth conversions is December 31st for any calendar year. 🟢
I didn’t really understand the tax part. Do they tax the money i already have within my rollover?
Happy to clarify!
Rollover IRAs are typically established to receive assets being rolled over from a workplace plan, such as a 401(k); however, Rollover IRAs and Traditional IRAs are treated the same for tax purposes. The Rollover IRA is simply a way to help distinguish between rolled over and contributed assets. If the funds in your Rollover IRA were from a rolled-over workplace plan, those assets were likely pre-tax and would be considered taxable if you convert all or a portion of the funds to a Roth IRA.
As a reminder, a Roth IRA is a tax-advantaged retirement account where you make after-tax contributions.
Keep the questions coming!
gotchaaa i understand. i apperciate it. One more question, is a rollover and roth ira basically the samething? same benefits and everything? but the only difference is a rollover like you said came from a workplace plan.
Happy to help!
Typically, Rollover IRAs holds pre-tax assets, and so is treated more like a Traditional IRA. There are differences between Roth IRAs and Traditional IRAs.
Let me share a resource that depicts the differences between the two IRAs.
Which IRA is right for you?: https://www.fidelity.com/retirement-ira/ira-comparison
Let me know if you have any additional questions regarding the differences between these accounts!
thank you very much for the information!
You are welcome! I’ll make sure @FidelityMarian knows. 🟢
My wife plan to convert her traditional IRA to ROTH IRA. She does not have account in Fidelity, what are the steps required?
Thanks for reaching out to us, @yeew!
To process a Roth conversion, you would simply need to transfer funds from a Traditional IRA to a Roth IRA. Please note that Roth conversions are taxable in the year they are completed. If your wife chooses to convert, you will typically receive two tax forms to report the conversion, Form 1099-R and Form 5498. Fidelity reports any Roth IRA conversion amounts as distributions on Form 1099-R. Form 5498 reports the conversion being deposited to your Roth.
It is important to keep in mind that a conversion would only be considered a tax-free event if you have $0 pre-tax IRA assets. You should be tracking all non-deductible contributions you make to your Traditional IRA on IRS Form 8606 to be able to show what portion of your IRA is already taxed when you take a distribution or conversion from the Traditional IRA.
If you hold both pre-tax and after-tax (non-deductible) funds in any of your Traditional IRAs, the conversion to a Roth IRA will be a taxable event because the conversion will consist of a pro-rata recovery of both taxable and nontaxable accounts. There are no provisions under the law that will allow an individual to isolate only the non-deductible dollars for conversion to a Roth IRA.
The portion of the IRA distribution which will be treated as non-taxable is determined by using the following formula:
(Total Non-deductible Contributions / Total non-Roth IRA Balances)
Roth Conversion and Taxes: https://www.fidelity.com/tax-information/tax-topics/roth-conversion
If your wife wants to hold her accounts at Fidelity and process the Roth conversion here, we can discuss further on the steps she can take to do that. Just let us know!