Roth IRA Conversions: What Can Be Converted

Roth IRA conversions involve transferring assets from a traditional pre-tax retirement account to a Roth IRA. This could be from a 401(k) or 403(b), for example, or from a simplified employee pension (SEP) plan. The conversion of assets can include all or part of the funds, but you’ll have to pay taxes on whatever amount gets converted since once those funds are transferred into a Roth IRA—you’ll be able to make tax-free withdrawals in the future.

Should I Convert to a Roth IRA?

Converting to a Roth IRA isn’t for everyone. It usually depends on your current income tax bracket and the bracket you expect to be in when you retire. You’ll need to pay taxes up front on the funds you plan to convert to a Roth IRA. Are you prepared to pay those taxes with resources outside of your retirement funds? These are just a few of the considerations you should have in mind before converting to a Roth IRA.

Converting your retirement savings account to a Roth IRA may be advantageous if you:

  • Expect to be in a higher tax bracket during retirement
  • Plan to keep the money invested in the Roth IRA for at least five years
  • Can pay the conversion taxes from assets other than those being converted

Because of the Roth IRA five-year minimum and age 59½ requirement before you can withdraw funds without penalty, it’s important to make sure you won’t need to withdraw from your Roth any time before that.

Unlike traditional IRAs and employer retirement plans, Roth IRAs have no Required Minimum Distributions (RMD) at age 73*. Funds in a Roth IRA can remain in the account for your designated heirs.

Converting to a Roth IRA may not be advantageous if you:

  • Expect to be in a lower tax bracket during retirement
  • Expect to need the assets in the next five years

If you choose to keep your funds in a traditional retirement plan, you must begin to take RMDs in the year you reach age 73* (if you were born after June 30, 1949), or age 72 (if you were born before July 1, 1949). Otherwise, you’ll be subject to a 50% penalty tax.

If you’re in a lower tax bracket in retirement, you’ll be able to make withdrawals from a traditional retirement plan at a lower tax rate.

Why Should I Pay the Resulting Conversion Taxes from Non-Retirement Assets?

When you convert your traditional retirement assets from another IRA to a Roth, you will have to pay taxes up front on any earnings and pretax contributions. If you tap your traditional retirement assets to pay the conversion tax, you miss out on the growth potential that money could have had, specifically growing tax-free as a Roth asset.

Should Retirees Convert to a Roth IRA?

Retirees who know they’ll be needing funds within five years may need to think twice before converting to a Roth IRA, given the five-year Roth IRA holding requirement. Of course, if you know you won’t be needing the funds during the holding period, or you’re converting to a Roth to leave the funds to your heirs, then it might make sense for you.

If your tax status is changing for some reason and you know you will be taxed at a higher rate in the future, you may consider converting some assets to a Roth so you can diversify how your retirement assets are taxed and gain more flexibility in managing taxable income in retirement. This is a discussion to have with MissionSquare Retirement at (800) 669-7400.

What Types of Retirement Accounts Can Be Converted to a Roth IRA?

Just about any defined contribution, traditional retirement, or IRA plan can be converted to a Roth IRA, including:

Do I Have to Convert 100% of My Account Assets to a Roth IRA?

No, you can choose to convert only a portion of your retirement account assets. If you're worried that converting all of your assets in a given year will put you into a higher federal income tax bracket, you should work with your tax advisor to figure out how much you can afford to convert without subjecting those assets to higher taxes. Converting too much could outweigh the potential benefits if you were to end up with a hefty tax bill.

Taxes When Converting to a Roth IRA

Whatever amount you convert to a Roth IRA will be subject to income taxes. The taxes will be calculated based on your marginal income tax bracket and the amount of money you convert from your traditional IRA or employer plan assets. If your IRA savings are composed entirely of nondeductible IRAs, you can convert them to a Roth IRA relatively simply. You won't have to pay tax on your contributions (which have already been taxed), but you will owe tax on the account's earnings. (This would also apply to other retirement accounts that allow non-deductible contributions.)

If you have both deductible and non-deductible savings in your IRA, making a conversion is more complicated. You must treat all of your IRAs (of both types) as if they were one big IRA. You'll need to report your “basis,” if any. (Generally, this relates to nondeductible or after-tax contributions previously made in your traditional IRA and reporting of your taxable conversion income to the IRS.)

You must prorate the amount of money you convert based on the proportion of nondeductible versus deductible funds in your total IRA. The prorated formula is as follows:

  • Total After-Tax Money in All IRAs ÷ Total Value of All IRAs × Amount Converted

Roth Conversion Limits

There are no conversion limits when converting from a traditional retirement account to a Roth IRA or from one type of IRA to a Roth IRA. You can contribute any amount of funds and make any number of transactions at any time.

Roth Conversion Deadline

The annual deadline for a Roth conversion is December 31.

What Happens If I Change My Mind After Conversion?

As of January 1, 2018, the ability to recharacterize (undo) a conversion from a traditional IRA or any other retirement plan to a Roth IRA is no longer allowed. However, you may continue to recharacterize IRA contributions between traditional and Roth IRAs.

Can I Make Annual Contributions to the Converted Roth IRA?

You must be eligible to make Roth IRA contributions based on your IRS Modified Adjusted Gross Income (MAGI) and tax-filing status. See Which IRA is Right for Me? for more information.

How do I Transfer a Traditional IRA to a Roth IRA?

Before making the decision to convert retirement assets to a Roth IRA you should consult with a qualified tax advisor.

Need help with a Roth IRA conversion?

To start the Roth IRA conversion process, contact MissionSquare Retirement at (800) 669-7400.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30th 1949, and before January 1, 1951), or age 73 (if you were born after December 31st, 1950).

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