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Convert a Traditional IRA to a Roth IRA?

Why? Roth IRAs have the potential to grow tax-free, which may help you save more over time. Plus, withdrawals aren’t mandatory during the lifetime of the original owner, and Roth IRA assets may pass to your heirs free of “catch up” income taxes.

Who is Eligible?

Anyone can convert their eligible IRA assets to a Roth IRA regardless of income or marital status. Until 2010, only those account owners who had a MAGI (modified adjusted gross income) below $100,000 were eligible to convert.

However there are various factors to consider before a IRS to Roth IRA conversion.

It’s also important to note that if you are required to take a minimum required distribution (MRD) in the year you convert to a Roth IRA, you must do so before converting.

Some Roth IRA rules.

Generally, converted assets in the Roth IRA must remain there for at least five years to avoid penalties and taxes. Distributions from a Roth IRA are tax-free and penalty-free provided that the five-year aging requirement has been satisfied and at least one of the following conditions has been met:

  • You reach age 59½
  • You pass away
  • You become disabled
  • You make a qualified first-time home purchase

MRDs are not required during the lifetime of the original owner of a Roth IRA. MRD amounts are not eligible to be converted to a Roth IRA.

Rolling a 401(k) directly into a Roth IRA

If you qualify, you can do an eligible rollover distribution from your old 401(k) directly to a Roth IRA. Income taxes will be payable, however, on the accumulated pre Roth IRA deferred income.

As with Traditional IRA conversions to Roth IRAs, if you are required to take an MRD in the year you roll over into an IRA, you must take it before rolling over your assets.

Converting a Roth IRA back to a Traditional IRA

Should you wish to convert your Roth IRA back to a Traditional IRA, the process is known as recharacterization. The deadline to recharacterize Roth IRA conversion contributions to a Traditional IRA is generally October 15 if you file your federal income tax return (or file for an extension) on time.

If you have recently recharacterized your account, those assets cannot be reconverted back to a Roth IRA before the later of:

  • The beginning of the calendar year following the calendar year of conversion.
  • The end of the 30-day period beginning on the day of the recharacterization.

Consult your tax advisor to determine your eligibility to complete a recharacterization or a reconversion.