Can we merge a Roth and traditional IRA into one account?


Q. My daughter has a Roth IRA and a non-deductible traditional IRA. Both IRAs are in bank CDs and only making about 2 percent interest. She wants to convert the traditional IRA to a Roth and then move everything to a brokerage account where she can invest in mutual funds. What would be the best way to do this? The goal is to have one Roth IRA account.
— Trying to help

A. Your daughter can certainly make this happen.

The first step would be to convert her traditional IRA to a Roth IRA, she can certainly do so.

She will need to pay taxes on any gains in the account, said Marnie Hards, a certified financial planner with Aznar Financial Advisors in Morris Plains.

For example, Hards said, if she contributed $5,000 to the traditional IRA and it is now worth $8,000, she will have to pay income taxes on the $3,000 of growth when she converts. Assuming the original contributions were not deducted, she does not have to pay taxes on the entire amount converted — only on the growth.

Once the conversion has been processed, she can then initiate a transfer from the bank where the Roth IRA is held to a brokerage firm to invest the money in the retirement account in mutual funds, Hards said. She recommends your daughter request that the brokerage firm process a direct transfer of funds from the bank.

“Although you could process the conversion after the transfer of the two accounts, my suggestion would be to do the conversion first so that the bank issues the 1099-R associated with the conversion,” she said.

If your daughter does not have the cash to pay the tax bill outside of the IRA account, it probably does not make sense to convert the IRA, Hards said.

“Ideally, the taxes due associated with the conversion is paid with funds outside of the IRA account,” she said.

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This story was originally published on Nov. 11, 2019. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.