September 26, 2011

Roth Conversion Defined

A Roth IRA conversion is a movement of assets from any of the following accounts to a Roth IRA.
For the purpose of this tutorial, these accounts are referred to as the ‘delivering accounts’.
Roth Conversion Eligibility Requirements
An individual can completed a Roth IRA conversion whether or not she has income/compensation for the year.
For Roth conversions that are done before January 1, 2010, the Roth IRA owner must meet the following requirements:
These limitations are repealed effective January 1, 2010.
No other limitations or eligibility requirements apply to a Roth IRA conversion. But, see reconversion

Written By

Retirement Dictionary Staff

Frequently Asked Questions Regarding

It depends.

From a technical perspective, contributions include regular contributions, and Roth conversion contributions. For the purpose of this website, we use the term contribution to refer to regular contributions.

Regular contributions can be withdrawn at anytime, and will be tax and penalty free. For instance, if you made a Roth IRA contribution yesterday, and withdraw the amount today, it will be tax and penalty free. This is because no tax deduction was (or could be) permitted/allowed for the contribution. In sum, a contribution with funds that have already been taxed will be tax and penalty-free when withdrawn.

Roth conversion amounts can be withdrawn at anytime, and will be tax-free, because any taxes owed on the amount is assessed when the conversion occurs. However, the amount will be subject to the early distribution penalty, unless either of the following applies:

  • The conversion has aged for at least five years
  • The distribution occurs when the Roth IRA owner is at least age 59 ½, or
  • An exception to the penalty applies ( exceptions listed here )

Important notes:

Note # 1

Distributions from Roth IRAs are considered to occur from ‘source of funding’, in a specific order. This is referred to as the ordering rules. Under these ordering rules, distributions occur from the following sources, in the order listed:

  • Regular contributions: These can be withdrawn at anytime, and will be tax and penalty free
  • Roth Conversions: These will be tax-free when withdrawn, but will be subject to the early distribution penalty, unless the owner is at least age 59 ½ when the distribution occurs, the conversion has aged five years, or another exception applies

  • Earnings: These will be subject to tax, unless the distribution is qualified, and will be subject to the early distribution penalty-unless the distribution occurs when the owner is at least age 59 ½ or an exception applies.

Distributions occur from one category (bucket), only after amounts in the previous bucket- as listed in the ordering rules- have been exhausted. For instance, distributions can never occur from conversion amounts, until all contribution amounts have been withdrawn.

Note # 2

There are two five year-periods for Roth IRA distributions.

Yes, they can. this amount would be deducted from your net pay/salary (the amount that you would receive on your paycheck). Find out if they will split your paycheck between more than one account for direct deposit. If they will, you can have a portion sent directly to your IRA (via direct deposit). If not, they may prefer to send a check to your IRA custodian/trustee with instructions to deposit the amount to your IRA. Not all employers want to accommodate such requests, as it is more ‘work’ for them. So while they can, they may choose not to accommodate such requests.

OTHER OPTION

Another option you can consider is to set up an automatic withdrawal from the account to which your paycheck is deposited and have the amount automatically deposited to your IRA. You would set this up so that the withdrawal is done after your paycheck is deposited. For example, assume that your paycheck is deposited to your checking account on the 15th and 30th of each month, you could schedule automatic withdrawals from your checking account a few days after your paycheck deposit dates, and have the bank deposit the amount to your IRA.

Whichever method you choose, follow-up with your bank to make sure the amount is deposited to your IRA as ‘IRA Contributions’. For amounts deposited during January 1 and April 15, notify the bank if you want those amounts to be treated as IRA contributions for the previous year.

You also want to make sure that your total contributions do not exceed the limit in effect for the year. Please click here to see limit https://www.retirementdictionary.com/definitions/ira

A: No. The deadline for making your IRA contribution for last year April 15. For instance, the deadline for making your IRA contribution for 2015 is April 15, 2016[1]. This means that your contribution should have been delivered to your financial institution by April 15 of this year if hand delivered, or postmarked by then if delivered by mail.

Your tax return should be amended to remove the contribution.

[1]Extended to the next business day if deadline falls on a weekend or public holiday. For 2015 contributions, the deadline is April 18, 2016.

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