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Can I convert less than the entire balance of my IRA

Last Updated October 7, 2011

Question: 

I have about $250,000 in a traditional IRA, and want to convert the amount to a Roth IRA. However, converting the entire balance will push me in a higher tax bracket, and I cannot afford to pay all the taxes that will be owed in one year.  I do not want to pay the taxes owed with my IRA funds, but instead prefer to pay it out of pocket (with non-IRA funds). Can I convert portions of that $250,000 traditional IRA over a period of several years? 

Answer: 

Yes. This is definitely permissible, and is a strategy recommended by many tax-professionals. Partial conversions (converting less than the entire non-Roth IRA balance), can lessen the tax impact of a Roth conversion, and allows the IRA owner to spread the tax burden from the conversion over more than one year. You can choose to convert amounts only in years when the tax impact would be lower. Note: Bear in mind that the taxable portion of any conversion amount would determine the amount of income tax owed for that year, based on your tax rate.

Tip: Individuals who completed Roth conversions, and determine that they are unable to pay the taxes due on the converted amount can recharacterize the entire conversion or a percentage of the conversion. The amount that is recharacterized is treated as if it was never converted for tax purposes.

Regarding the suggestion you received to pay the income tax from your IRA: such an option is usually not recommend for reasons which include the following:

  • It would reduce your IRA balance, leaving a lesser amount to accrue earnings on a tax-deferred basis
  • You would lose the benefit of enjoying compound tax-deferred (or tax-free in the case of a Roth IRA) earnings on the amount withdrawn ( or withheld at the time the conversion is done) to pay taxes
  • The amount withdrawn to pay taxes would be subject to the 10% early distribution penalty if you are under the age of 59 ½ when the withdrawal occurs, unless you qualify for an exception.

 

Nevertheless, that does not mean that one should not do a Roth conversion if the only option for paying income tax is to pay the amount from the IRA. In this- and all other cases related to Roth conversions, we recommend working with a tax/financial professional to determine whether a Roth conversion makes good financial and tax sense. Generally, a Roth conversion analysis would be done to make a reasonable determination.

Question answered by Denise Appleby