IRA Rollover vs. IRA Conversion

An IRA rollover allows you to move money from one or more retirement accounts into a new individual retirement account. An IRA conversion is an opportunity to turn your traditional (and taxable) IRA savings into a tax-free Roth account. If you’re weighing an IRA rollover vs. IRA conversion, it’s important to understand the purpose behind them, and the potential tax implications.

Consider working with a financial advisor as you explore how best to handle your tax-advantaged accounts.

What Is an IRA Rollover?

An IRA rollover involves moving funds from one qualified retirement account to an IRA. For example, you might move funds from a 401(k) to a traditional IRA if you decide to change jobs or retire. The IRA rollover process is relatively simple. Here’s what you’ll need to do:

Decide which type of IRA you want to open for the rollover. If you’re moving pre-tax assets then you’ll need a traditional IRA; after-tax assets can be rolled into a Roth IRA.
Request a direct rollover from the administrator or custodian of the retirement account you want to move. You’ll need to fill out some paperwork and tell the custodian or administrator where the funds should go.
Wait for the rollover to be completed, which may take four to six weeks. Once the funds have rolled over to your new IRA, you’re free to decide how to invest them.

IRA rollovers can be beneficial if you want to consolidate retirement accounts or prefer greater control over your investments. It might make sense to roll over your workplace plan if you’re retiring or if you’re changing jobs and don’t want to leave your savings behind. Keep in mind that if you’re moving to a new employer, you also have the option to roll your old 401(k) into your new one, if one is offered as part of your benefits package.

What Is an IRA Conversion?

An IRA conversion is the process of converting a tax-deferred IRA into a Roth account. Unlike an IRA rollover, IRA conversions are taxable events, and the amount converted is subject to income taxes in the year of the conversion.

There are two types of IRA conversions:

Traditional IRA to Roth IRA conversion: Involves converting funds from a traditional IRA to a Roth IRA which can provide tax-free withdrawals in retirement.
Simplified Employee Pension (SEP) or SIMPLE IRA to Roth IRA conversion: You can convert funds from a SEP or SIMPLE IRA to a Roth IRA. This can be subject to additional taxes and penalties.

Here’s what you’ll need to do to complete an IRA conversion.

Contact the IRA custodian or financial institution where the traditional IRA is held. Let them know you want to make a conversion.
Request a conversion of funds from the traditional IRA to the Roth IRA.
The IRA custodian or financial institution will deposit the converted funds into the Roth IRA.
Report the converted amount as income on the tax return for the year in which the conversion is completed.

IRA conversions can potentially lead to a sizable tax bill. If you have a substantial amount to convert, you may want to spread the conversions out over several years. That way, you can plan ahead to cover the associated tax liability without having to pay it all at once.

Also, note that Roth IRA conversions have a five-year waiting period. Under the five-year rule, you must wait five years before withdrawing converted funds to avoid taxes and penalties.

Differences Between IRA Rollover and IRA Conversion

The differences between an IRA rollover vs. IRA conversion center on taxes, eligibility, timing and investment options. IRA rollovers are usually tax-free, assuming the rollover is completed within 60 days from its initiation.

IRA conversions, on the other hand, are generally taxable with the full amount converted subject to income taxes in the tax year of the conversion. The two also differ in eligibility: IRA rollovers are typically available to anyone with a qualified retirement plan. IRA conversions, meanwhile, have income limits that may restrict eligibility.

Another difference between IRA rollovers and IRA conversions is in their timing. Indirect IRA rollovers, in which you receive a check for the amount being rolled over, must be completed within 60 days of the distribution from the qualified retirement account. If you don’t complete the rollover within that window, the entire amount is treated as a taxable distribution. Early withdrawal penalties may also apply. IRA conversions can be completed at any time.

Lastly, IRA rollovers and IRA conversions may have different investment options. Traditional IRAs, which are typically used in IRA rollovers, may offer a wider range of investment options compared to Roth IRAs used in an IRA conversion. The types of investments you have access are also determined in part by your IRA custodian. That’s an important consideration when choosing a brokerage to work with.

Direct Rollovers vs. Trustee-to-Trustee Transfer

A couple decides between an IRA rollover vs IRA conversion.

Depending on where and how your funds are held, you may have the option to initiate a direct IRA rollover or trustee-to-trustee transfer. Both methods move retirement funds from one account to another without incurring taxes or penalties. However, there are some key differences between the two:

Initiation: With a direct IRA rollover, the owner initiates the rollover by requesting the distribution from the current custodian and specifying the new custodian. With a trustee-to-trustee transfer, the current custodian initiates the transfer by sending the funds directly to the new custodian.
Required Minimum Distributions (RMDs): If an account owner is at the age where they must take required minimum distributions (RMDs), they have to do so before initiating a direct rollover. With a trustee-to-trustee transfer, the RMD can be taken at any time during the year. This includes the time after the transfer occurs.
Fees: With a direct IRA rollover, the account owner may be subject to fees from the current custodian for closing the account. With a trustee-to-trustee transfer, there are typically no fees.
Number of rollovers per year: With a direct IRA rollover, an account owner can generally only perform one rollover per year. With a trustee-to-trustee transfer, there are no such limits.

There’s also a difference in what’s being moved from point A to point B. Workplace retirement plans must be rolled over while one IRA can be transferred to another, at the same custodian or a different one.

What to Consider When Weighing a Rollover vs. Conversion

Generally, whether you should choose an IRA rollover or a conversion depends on your purpose.

You might consider an IRA conversion if you:

Would like to turn taxable retirement assets into tax-free assets
Can cover the estimated tax liability associated with the conversion
Expect to be in a higher tax bracket in retirement

You may choose a rollover if you:

Are changing jobs and don’t want to leave your 401(k) behind
Have multiple old 401(k) plans you want to consolidate
Would like to move your retirement assets to a new custodian

As you weigh the options, consider the range of investment options offered at the new custodian. Also, keep RMDs in mind.

RMDs are required for traditional IRAs starting at age 73, while Roth IRAs are not subject to RMDs. Individuals who want to delay RMDs may prefer an IRA rollover, while those who want to avoid RMDs altogether may choose an IRA conversion.

Estimate your annual RMDs and see how they fit into your broader retirement picture. SmartAsset’s RMD Calculator gives you a clear snapshot of your withdrawal obligations.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

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RMD Amount for 401(k) #1

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RMD Amount for 401(k) #2

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

Bottom Line

A couple enjoy their retirement, having decided between an IRA rollover vs IRA conversion.

When deciding between an IRA rollover and an IRA conversion, it’s important to consider one’s personal tax situation, eligibility, investment options, RMDs, and timing. It’s also important to consult with a financial professional to determine the most suitable strategy based on one’s individual circumstances and goals. The bottom line is that the choice between an IRA rollover and an IRA conversion depends on many factors unique to everyone and it’s important to carefully consider all options before deciding.

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