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Converting to a Roth IRA     

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If you have a Traditional, Rollover, or SEP-IRA, you may convert some or all of your existing IRA assets to a Roth IRA providing you meet the Adjusted Gross Income (AGI) requirement.  Specifically, your modified AGI must be $100,000 or less (not including the IRA conversion amount) in the year of conversion.   The limitation is the same for both married and single taxpayers.  You CANNOT file “married filing separately” and do the conversion unless you and your spouse have lived apart for the entire year.

While a conversion requires you to include the taxable assets you are converting in current income, it enables you to avoid future federal taxes on any subsequent IRA earnings and withdrawals (provided certain conditions are met). This opportunity for federally tax-free growth and federally tax-free distributions can substantially increase the value of your retirement savings down the road.


If you are under 59 1/2, you will be subject to a 10% early withdrawal penalty on any amounts distributed from your IRA and NOT converted to a Roth IRA within 60 days.

As a point of information, SIMPLE-IRA assets that are withdrawn in the two-year period beginning on the date you first participated in a SIMPLE-IRA plan maintained by your employer may NOT be converted to a Roth IRA.

In making the decision of whether or not to make the conversion, you need to consider the following:


Can you pay taxes on converted IRA assets from sources other than the IRA itself?


To allow as much money as possible to grow federally tax-free, you should pay any applicable taxes on your IRA distribution out of your non-retirement savings. As long as you can pay the taxes from another source, you may benefit from a conversion.  If you must use some of your IRA assets to pay the taxes, you may be subject to an early withdrawal penalty on those assets. The resulting “cost” of converting could outweigh the benefit of federally tax-free growth. 

If converting all of your existing IRA assets to a Roth IRA presents a tax burden that is too large for you to pay, consider converting just a portion which results in a tax payment you can handle.  Remember, too, that withholding taxes from a Roth IRA conversion may make you ineligible for a Roth IRA conversion as amounts withheld are used in determining conversion AGI eligibility.


Can you leave your converted assets in your Roth IRA for at least five years?


The longer you expect your assets to remain in your Roth IRA, the more you can benefit from its federally tax-free growth potential.   Keep in mind that you may only benefit from federally tax-free distributions if you meet certain five-year aging and other qualified withdrawal requirements.


Will your tax rate be higher or lower when you use the money?


If you think your tax rate will be the same or higher than your current rate when you withdraw your money, it may make sense to pay the tax liability now – in exchange for the opportunity for federally tax-free growth and federally tax-free distributions in the future.


Have you made nondeductible IRA contributions?


If so, you’ll only need to pay taxes on the earnings on those contributions when you take a distribution or convert. Taxes may also be due on any deductible or pre-tax contributions and earnings, as they must be included in your current income. Remember, however, that the IRS will consider the distribution to be prorata from deductible, nondeductible and pre-tax money, even if they are in separate IRAs.2


How to convert to a Roth IRA

You need to contact the company managing your IRA for the necessary forms.