Roth conversions can be accomplished in the following ways:
- Effecting a movement of assets directly from the Traditional, SEP or SIMPLE IRA to the Roth IRA. Under this option, the assets are made payable to the Roth IRA custodian. In most cases, the conversion occurs between IRAs held by the same custodian. This type of transaction is referred to as a direct conversion.
- The IRA owner taking a distribution from his/her Traditional, SEP or SIMPLE IRA, and rolling over the amount to his/her Roth IRA within 60-days. This type of transaction is referred to an indirect conversion.
For an indirect conversion, the rollover should be treated as a ‘Roth conversion’ and not as a regular rollover, in order for it to be properly reported to both the IRS and the IRA owner.
Effective January 1,2008 , Roth conversions can occur from qualified plans, 457(b) and 403(b) plans to Roth IRAs. Prior to this date, the assets had to be first rolled over to a Traditional IRA or SEP IRA before being converted to a Roth IRA.
A Roth conversion is treated as ordinary income to the IRA owner. Therefore, except for amounts attributable to after-tax rollovers or nondeductible contributions, the conversion will be taxable.
IRC §408A, IRS Publication 590
Additional Helpful Information
- Individuals are eligible to convert to a Roth IRA, only if they meet the following requirements:
- The individual’s adjusted gross income for the taxable year does not exceed $100,000; or
- The individual’s tax filing status is not ‘married filing separately’ IRC §408A(c)(3)(B)
However, this restriction was repealed under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) effective for tax years beginning January 1, 2010.
- Roth IRA conversions are not subject to the 10 percent early distribution penalty which applies to distributions that occur before the IRA owner reaches age 59 ½ [IRC §408A(d)(3)(A)(ii)]
- A Roth conversion can be nullified (make void) VIA a recharacterization
- Effective January 1, 2005, the amount of any required minimum distribution (RMD) amounts from a Traditional IRA, SIMPLE IRA, or SEP IRA is not included in MAGI for purposes of determining the $100,000 limit for conversion eligibility (IRC Sec. 408A(c)(3)(C)(i))(II) and Treasury Regulation 1.408A-3, Q&A 6). The regulations do not address RMD from a qualified plan, 403(b) or 457 plans. As such, it appears that RMD from these plans are not excluded from the individuals MAGI when determining the $100,000 limit.