Rules for IRA Conversion to Roth

By Kent Ninomiya

  • Overview

    Any taxpayer who wants to convert a Traditional IRA to a Roth IRA must follow specific rules laid out by the Internal Revenue Service. The IRS dictates who can perform a Traditional IRA to Roth IRA conversion, when they can do it and the tax consequences of the transaction. It is important to know and follow these rules in order to avoid IRS fines and penalties.
  • Filing Status

    Rules for Traditional IRA conversion to a Roth IRA restrict which taxpayers can convert, based on their filing status. Taxpayers who file their taxes as "single" or "married filing jointly" are allowed to convert their Traditional IRAs to a Roth IRA. However, taxpayers who file their taxes as "married filing separately" are not permitted to convert.
  • Modified Adjusted Gross Income

    Rules for Traditional IRA conversion to a Roth IRA only allow taxpayers to perform the transaction in a tax year when their Modified Adjusted Gross Income (MAGI) is less than $100,000. MAGI is calculated by first determining your Adjusted Gross Income. This is your income from wages and investments before taking your itemized or standard deduction. Once you determine your AGI, add in deductions and expenses like your Traditional IRA contribution, educational expenses, foreign housing, domestic production activities and adoption expenses your employer paid. Also add in series EE bond interest income and the foreign earned income exclusion. The resulting figure is your MAGI.
  • Deadline

    Rules for Traditional IRA conversion to a Roth IRA require taxpayers to convert on or before December 31 of the tax year. Contributions to Traditional IRAs and Roth IRAs can be made until April 15 of the following calendar year, but Traditional IRA conversions to Roth IRAs must happen the same year.
  • Converstion Amount

    Rules for Traditional IRA conversion to a Roth IRA do not specify how much money can be moved from a Traditional IRA to a Roth IRA. As long as the taxpayer follows all of the rules for Traditional IRA conversion to a Roth IRA, he can move any amount from a Traditional IRA into a Roth IRA.
  • Tax Consequences

    Rules for Traditional IRA conversion to a Roth IRA require investors to pay taxes on some of the money being moved. Traditional IRA investments are often made with pre-tax money. Roth IRA investments are made with money that has already been taxed. When taxpayers perform a Traditional IRA conversion to a Roth IRA, they are essentially taking a distribution then redepositing the funds. They therefore must pay taxes on the previously untaxed portion of the Traditional IRA. This can be a sizable tax bill if there is a lot of money being converted. The long term benefit of tax free growth in a Roth IRA can offset this tax bill over time.
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