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Converting from a Traditional IRA to a Roth IRA

Eligibility

You may convert all or part of your Traditional IRA into a Roth IRA assuming you meet the following requirements:

• If married, you file a joint tax return
• Your AGI (single or joint) for the year does not exceed $105,000¹

Assets converted to a Roth IRA are subject to limitations and requirements, these include:

• Assets converted must remain in the Roth IRA for five years before they can be withdrawn without penalty. To simplify the identification of converted assets, it is encouraged that you establish a separate Roth IRA for converted assets.
• You may not contribute to a Roth IRA if your AGI (single or joint) is greater than $105,000.

Tax Treatment

Your conversion counts as a Traditional IRA distribution in the year it is completed, and as such is subject to ordinary income taxes. Paying income taxes reduces your assets, which could lessen the burden of estate taxes later.

 

¹Plan ahead: the income restriction will be lifted in 2010 allowing anyone to convert their Traditional IRA to a Roth IRA regardless of income. Note that conversions will still be treated as taxable events. However, a special rule applies to conversions made in 2010 that allows you to average the taxable income between your 2011 and 2012 tax returns.