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February 17, 2009

Indirect Conversion

Your Guide



A  Roth conversion, where the IRA owner takes a distribution from the retirement account that is a Traditional, SEP or SIMPLE IRA (non-Roth IRA)  and rolls-over over the amount to his/her Roth IRA within 60-days of receiving the distribution.
For an indirect conversion from , the rollover should be treated as a ‘Roth conversion’ and not as a regular rollover, so that it is reported properly to the IRS and the IRA owner.
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.
Conversions are exempt from the early distribution penalty. As a result, code 2 is inputted in box 7 of 1099-R if the IRA owner is under age 59 ½ when the conversion is processed. However, for those that are done VIA indirect-conversions, the 1099-R will reflect Code 1 in Box 7– unless an exception applies, because the custodian will (rightfully) treat the transaction as a regular distribution. To ensure that the conversion amount is exempted from the early distribution penalty, the IRA owner should file IRS Form 5329 and claim the exemption.
A Roth conversion is treated as a conversion for the year that the assets leave the non-Roth IRA. For instance, if an individual withdrawals amounts from a traditional IRA in December, and deposits the amount to a Roth IRA in January, the conversion is considered to have been done in December and taxable.
Referring Cite
IRC §408A, IRS Publication 590
Additional Helpful Information
Individuals were eligible to convert to a Roth IRA, only if they meet the following requirements:
  1. The individual’s adjusted gross income for the taxable year does not exceed $100,000; or
  2. The individual’s tax filing status is not ‘married filing separately’[1]

However, these restrictions were repealed under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) effective for tax years beginning January 1, 2010.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  that applies to distributions that occur before the IRA owner reaches age 59 ½  [2]

Roth IRA Conversions are not subject to the one-per-year IRA -to-IRA rollover rule[3]


[1] IRC §408A(c)(3)(B)

[2] IRC §408A(d)(3)(A)(ii)

[3] IRC § 408A(e)

[1] IRC §408A(c)(3)(B)
[2] IRC §408A(d)(3)(A)(ii)

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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