Tax Topic

ROTH IRA Conversion (Traditional to Roth)

Prior to 2010, you could not convert from a traditional IRA to a Roth IRA if your adjusted gross income (AGI) was over $100,000. Beginning in 2010 (and continuing) that limitation is eliminated. However, when converting a traditional IRA to a ROTH IRA after 2010, you must include the conversion income on your current income tax return and pay federal income taxes on the amount. When you do a conversion, the taxable portion of the conversion is equal to the contribution amount times (no-basis traditional IRA total across all traditional IRAs divided total of all traditional IRAs). You cannot convert only traditional IRA amounts with basis.

Conversion considerations: ROTH contributions are not tax-deductible, but earnings can be withdrawn income-tax-free if you're at least 59½ and have had the ROTH at least five years. You don't need to take required minimum distributions (RMDs) starting at age 70½, as you do with a traditional IRA. A ROTH will reduce your taxable estate by the amount of income tax you pay to convert so this can reduce estate taxes for your heirs. With a traditional IRA, you gain an immediate tax benefit because you can deduct your contributions now, but distributions are taxed many years later as ordinary income.

The issue comes down to what your tax situation is in the year of conversion versus what it might be in retirement. And of course, you must have the funds available to pay the income taxes due upon conversion. Also keep in mind you must recognize the not-previously-taxed portion of the conversion amount as ordinary income - meaning it becomes part of your AGI - so you may become ineligible for certain deductions or credits because of AGI limitations.

For details on all IRA's refer to IRS Publication 590-A (https://www.irs.gov/pub/irs-pdf/p590a.pdf) and 590-B (https://www.irs.gov/pub/irs-pdf/p590b.pdf)

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