Roth IRA Conversion
Below are answers to the questions we are most frequently asked regarding conversion from a Traditional IRA to a self-directed Roth Individual Retirement account. As with any taxable event, it is best to consult a professional tax advisor before making any decision.
- How do the Roth and Traditional IRAs differ?
- Am I required to convert the entire amount in my Traditional IRA?
- If I have non-deductible contributions within my Traditional IRA, can I convert that portion and avoid conversion taxes?
- When is the deadline for a conversion?
- Is there any way I can reverse a conversion?
- How do I convert my traditional IRA to a Roth IRA?
- Are there income limits for conversion of funds from a Traditional IRA to a Roth IRA?
How do the Roth and Traditional IRAs differ?
For information on the self-directed Traditional IRA at Equity Trust.
For information on the self-directed Roth IRA at Equity Trust.
For a comparison between the self-directed Traditional IRA and self-directed Roth IRA.
Am I required to convert the entire amount in my Traditional IRA?
No. The amount you convert is completely up to you.
If I have non-deductible contributions within my Traditional IRA, can I convert that portion and avoid conversion taxes?
The portion of any distribution made from your Traditional IRA related to nondeductible contributions will avoid taxation upon conversion into the Roth IRA because such nondeductible contributions are deemed to have a tax basis equal to the amount of the nondeductible contributions. However, any earnings related to the nondeductible contributions will be treated in a similar manner as deductible contributions and will be subject to taxation upon conversion into a Roth IRA.
When is the deadline for a conversion?
If you convert to a Roth IRA through either a trustee-to-trustee transfer or by redesignating funds held by a trustee to a Roth IRA, you will need to do so by December 31st of that calendar year. If, however, you elect to convert to a Roth IRA by distributing assets from your Traditional IRA and then personally transferring such funds to a Roth IRA, you will need to distribute such assets by December 31 of that calendar year and you will then have 60 days after such assets are distributed to deposit them into a Roth IRA. It is important to remember these time requirements and deadlines as many people confuse them with the April 15th annual deadline applicable to contributions to a Traditional and/or Roth IRA.
Is there any way I can reverse a conversion?
Yes. If you no longer qualify for a Roth, due to unexpected income, you may reverse your conversion, which is termed a re-characterization. If the improper contribution is not timely recharacterized, the contribution will be treated as an excess contribution to your Roth IRA and will be subject to an annual 6% excess contribution penalty tax until corrected.
How do I convert my traditional IRA to a Roth IRA?
There are two ways to convert your Traditional IRA to a Roth IRA.
If your IRA is currently held by another custodian or trustee, instruct them to convert the Traditional IRA to a Roth IRA. Once the conversion has taken place, you may transfer the Roth IRA to an Equity Trust Company self directed Roth IRA. Click for more information on how to transfer and rollover IRAs into an Equity Trust IRA.
If you currently have a Traditional IRA at Equity Trust, just request a Roth Conversion form from our office. Once the form has been completed and received, your Roth IRA will be established. It's that simple.
Are there income limits for conversion of funds from a Traditional IRA to a Roth IRA?
No. You do not have to have earned income to convert to a Roth IRA, only to contribute. However, if you do have earned income, follow these income requirements:
- Your modified adjusted gross income (MAGI) for Roth IRA purposes is not more than $100,000. (If Married filing jointly - Combined MAGI must be less than $100,000 for the tax year that he/she wishes to convert.)
- You are not a married individual filing a separate return. (If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.)
In 2010 every American, regardless of their income, will be permitted to convert to a Roth IRA, which allows tax-free withdrawals. In May of 2006, President George W. Bush signed a tax-cut bill that allows anyone with a Traditional IRA, even high-income taxpayers, to convert their IRA into a Roth IRA. The new tax bill will suspend the current $100,000 MAGI income limit for Roth conversions for two years beginning in 2010. After an initial tax payment when converting to a Roth IRA, you will benefit with considerable tax savings in later years when making withdrawals. In addition, if you convert in 2010, you won't have to pay taxes on the conversion that year. You will be allowed to pay half your tax bill in 2011 and the other half in 2012.
For a more detailed look into the rules and regulations for Roth Conversions, please see IRS Publication 590