Roth IRA Rollover vs. Roth IRA Conversion: What's the Difference?

Roth IRA rollovers and Roth IRA conversions are both ways of transferring funds from one type of retirement account to another, but they are not quite the same.

A Roth IRA rollover involves moving retirement funds from one account to another, such as rolling 401(k) funds into a Roth IRA account. A Roth IRA conversion, however, involves moving funds from what are often pretax accounts such as a traditional 401(k) or IRA into a Roth IRA, the latter of which provides tax-free withdrawals. To make this switch, you need to pay taxes on the conversion.

Learn more about what distinguishes a Roth IRA rollover from a Roth IRA conversion, what the advantages are to each, and the steps you need to take to complete them.

What’s the Difference Between a Roth IRA Rollover and a Roth IRA Conversion?

In many ways, Roth IRA rollovers and Roth IRA conversions are similar. Technically, a conversion is a type of rollover. However, in practical use, there are some distinct differences. In the table below, you’ll find more about some of the key similarities and differences.

Eligibility

To make a Roth IRA rollover, you first need to have one account with after-tax retirement funds, such as in an employer-sponsored plan like a Roth 401(k). From there, you can roll over assets from the Roth 401(k) to a Roth IRA without being subject to income limitations as you would if you directly contributed to a Roth IRA.

A Roth IRA conversion is considered to be a “backdoor” way to fund a Roth IRA, as you aren’t subject to any income limitations that apply to direct contributions.

Taxes

The most significant difference between Roth IRA rollovers and Roth IRA conversions is the tax implications.

With Roth IRA rollovers, you’re moving money from one type of Roth account to another. That does not trigger any immediate tax implications, because you’ve already used post-tax money to contribute to your employer-sponsored Roth account, and you’re simply rolling those funds into a Roth IRA that similarly involves post-tax contributions.

In contrast, Roth IRA conversions are taxable events. That’s because a conversion often involves moving funds from a pretax account into one that takes taxed funds.

Distributions from a pretax account such as a 401(k) or traditional IRA would be subject to taxes. However, Roth IRAs enable tax-free withdrawals in retirement.

A Roth IRA conversion requires individuals to pay ordinary income taxes for the tax year they make the switch, based on the amount of money they convert. That can lead to some larger tax bills—but in the long run, depending on your investing horizon, Roth IRAs can still lead to tax savings.

RMDs

Both Roth IRA rollovers and Roth IRA conversions can help individuals avoid required minimum distributions (RMDs), but there are some important nuances.

Typically, employer-sponsored accounts such as 401(k)s, including Roth 401(k)s, require account holders to start taking distributions once they reach a certain age (generally age 72). However, some plans allow employees to avoid RMDs if they’re still working past that age.

Either way, rolling over funds into a Roth IRA means that account holders can enjoy no RMDs.

The same concept applies to Roth IRA conversions. That may mean you need to make the conversion sooner if you want to fully avoid RMDs. Once you have to start taking RMDs, the RMD amount for the year in which you’re making the conversion can’t be included when moving over the funds.

Five-Year Rule

Roth IRA rollovers and Roth IRA conversions share the fact that they need to be open for at least five years to make tax-free withdrawals of rolled over or converted funds, beginning Jan. 1 of the year the first contribution is made.

Each rollover or conversion resets the clock on making tax-free withdrawals, except for earnings. For earnings, the five-year rule starts Jan. 1 of the year you start your Roth IRA, even if you make new contributions.

The Bottom Line

Both Roth IRA rollovers and Roth IRA conversions involve moving money from one retirement account into a Roth IRA retirement account. Doing so can help individuals save money long term if they can then grow their Roth IRA assets tax-free and withdraw earnings tax-free.

However, you don’t always have a choice to make between making a Roth IRA rollover or a Roth IRA conversion. It will depend on which type of retirement account you currently hold. If you already have after-tax funds such as in a Roth 401(k), then you would be eligible to make a rollover. If you have a pretax account such as a traditional 401(k), you could make a conversion.

Roth IRA conversions tend to be more tax-oriented. If you think that you’ll save on taxes long term by making the change, and you can afford the initial tax implications at the time of the conversion, then that could be an option to explore.

Frequently Asked Questions (FAQs)

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