Found a post that almost explained it all here – but it didn’t quite work for me. I didn’t have an option to convert to AAC! Then I found another post here that helped me figure out why.

So here’s the trick:

1. Go to your Import Settings in iTunes (they are in different places depending on Mac or PC). If it’s not already, set it to import files as AAC.
2. Locate the track you want to use in iTunes. Many songs start out a little quiet – which is no good for a ringtone – so play the track and write down the times where the ringtone should start and finish.
3. Right-click the track and click Get Info. On the Options tab mark the start time and then end time for your ringtone. Click OK.
4. Right-click the track again and choose Create AAC Version. (This won’t be there if your import settings are set to MP3.) This will create a new track based on the times you have entered, in the same folder as the other track.
5. Right-click the track again and choose Show in Finder (Or Show in Explorer).
6. Locate the new file and change the filename so it ends in .m4r instead of .m4a
7. Double-click that file and iTunes should then import it as a ringtone, not a normal track.
8. Go to the settings in your iPhone and the new ringtone should t=be there under the Custom heading (after you have synced it of course!)

Phew! But it saves buying ringtones for songs you already own!