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March 3, 2009

Can I convert less than the entire balance of my IRA

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Can I convert less than the entire balance of my IRA

QuestionI 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.

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would lose the benefit of enjoying compound tax-deferred (or tax-free in the case of a Roth IRA) earnings on the amount withdrawn (or withheld at the time the conversion is done) to pay taxes
• The amount withdrawn to pay taxes would be subject to the 10% early distribution penalty if you are under the age of 59 ½ when the withdrawal occurs, unless you qualify for an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 http://www.applebyconsultinginc.com/ Denise Appleby

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 http://irapublications.com. 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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