Hi Jill – The pro-rata rules have to do with taking early distributions from an IRA. Roth contributions are the same as they are for traditional IRAs, at $5,500, but $6,500 if you’re 50 or older. And our incoming President has indicated a desire to lower rates even further. But then you’re betting where tax rates will be. Thanks. From what I read here that’s not the cast. The main reason I am looking to make this change (just for this year) is because I am married filing separately this year (due to personal and employment circumstances), meaning I am subject to the $10,000 limit, which I am well over. (Reference: http://www.nolo.com/legal-encyclopedia/are-social-security-disability-benefits-taxed.html). Is there away around some of these penalties & taxes due to I have no other income? I believe that the IRA and 401k conversions are separate conversions, so you’d be looking at the tax liability only on the 401k amount. Also, I converted an IRA to a Roth somewhere around 2001 and was allowed to spread the taxes over four years. Hi, Very helpful article. For the first time, I converted an IRA to a Roth in mid 2016. All written content on this site is for information purposes only. I’d like to pose a followup question. I just made a partial Roth conversion for 2017. Let’s also assume enough retirement income to be in the same tax bracket in retirement as prior to retirement, as well as a willingness to move into one higher tax bracket, but no more, with the annual income tax (state and federal) on the Roth conversion amount (even if you have to use previously converted Roth accounts to pay the taxes when you run out of taxable account money). I also recently rolled over my 401k. So how can you fund the traditional Ira to convert to Roth if you are above the limit? Great article Jeff. If you're planning to roll over all your assets from a traditional individual retirement account to a Roth version, you might want to tap the brakes. Hi, I have one 401k where I still work that allows pre, post and ROTH contributions. Does it make sense for me to start slowly converting 457 to Roth IRA, spread over say 10 years (to avoid getting into 28% tax bracket)? Hi Kyle – As to #1, no the conversion amounts aren’t considered to be Roth contributions, only conversions. What I do know is that people do partial conversions all the time, so I’d be really surprised if that turns out to be true. Most of my current income is through investments, however I have a considerable sum between my wife and I in 401K and Traditional IRA. Can I subtract the full $15k historical basis in 2016 against my ROTH conversion amount and just take the benefit this year, or do I have to go back and file amended returns for each of the last two years to use part of the basis in each of those years? -Cal. If you stagger the conversion, will each individual stagger segment be subjected to the 5 year rule? Regards. I have been retired for many years, I have two traditional IRAs. (3) This avoids line 6, which asks for the value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the prior year. Thanks so much for your help! That’s an excellent question for an accountant! Hi Larry – The Roth IRA transfers to your wife. I never made another contribution to this IRA, and since it’s been doing nothing but sitting in a money market account all this time, it only changed in value from August, 2005 to September, 2017 for a total increase in value of about $800 ($650 after annual maintenance fees). I do have a Roth IRA which is more than 5-year old. Coordinate the conversion with your broker(s) and a good CPA. Note that, if you don’t follow the rules outlined above and your money doesn’t get deposited into a Roth IRA account within 60 days, you could be subject to a 10% penalty on early distributions as well as income taxes on the converted amounts if you’re under the age of 59 ½. Can this be done? Do I have until April 15, 2015 or did I need to do it before 31 Dec 2014? Assume that my longstanding Traditional IRA contains $450,000, of which $45,000 is after-tax money that has remained the same amount for 12 years or so. Not to mention we’re sitting on a $20 Trillion debt that is growing by the minute. Hi Ben, I am over 70.5 years, retired. Hi Harold – since both IRA accounts were funded with nondeductible contributions, you are correct that only the gains on those accounts will be taxable. -In January 2016, I switched to Traditional. It may come down to how much you can afford to pay, especially since the tax will need to be paid outside the converted balance. Currently we do not have any type of IRA account (besides the 401(k)). The IRS does not permit you to circumvent regulations, and it’s doubtful that a trustee would permit it. If you do a direct trustee-to-trustee transfer there are generally no withholding. These were my only traditional IRA contributions. If he is in the 22% income tax bracket, he will owe $26,400 in income taxes, or $120,000 x .22. Many people believe it doesn’t make sense to convert a traditional IRA to a Roth IRA late in life. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to … Hi Dave – According to the IRS you can contribute to both a Roth IRA and a SIMPLE IRA, as well as a 401k, at the same time. Everything under the higher bracket still only incurs that lower bracket’s rate (and funds over the higher bracket-mark *would have* incurred that previous rate, at the very least . And, then convert my pension/401K to a new IRA account #2 LATER in the same calendar year (i am retired). When Would You Want to Convert to a Roth IRA? I’m preparing to leave my employer within the next month or so and retire. And based on what you’re saying, you probably won’t. These are not in any sort of IRA or retirement plan. At the moment you should have no issue with the $20k conversion. I have a traditional IRA worth 250k that was all pretax contributions. I am ready to fund my 2016 Traditional IRA and immediately convert to a Roth IRA. I can give you a more definitive answer – NO! I am 49. Guide to Roth Conversions – Why, When, and How Much to Convert. Thanks for the easy to understand piece! What about rolling over to a Roth IRA? So if I want to convert $50k from a traditional IRA to a Roth but take $5k of that to pay the taxes I’d pay taxes on $50k plus incur a $500 early withdraw penalty on the $5k that doesn’t make it into the Roth? I have one question: The company I work for is being bought out and we are going to switch 401k providers. Only someone who knows the details of your tax situation can tell you if the conversion will truly be a benefit to you. The earnings on the contributions will be taxable, but you’ll get a break on the contributions themselves. Each year I have to recharacterize some or all of my yearly contributions to a Traditional IRA. So my questions is do I report Rollover IRA amount of $45,000 on line 6 of the 8606 form which states “Enter the value of all your traditional, SEP, and SIMPLE IRAs as of the end of the year” which will force me to pay taxes on 90% of my contribution or do I put $0 on that line and pay no taxes on the conversion? Also, Roth IRAs are unique in that the don’t require RMDs (required minimum distributions) by age 70 1/2. Can we still transfer Ira to a Roth to lower the amount of tax when RMD takes effect. Hi Jeff, My husband and I need some advice on a Roth conversion. Mike. However, the potential exists for the imposition of the IRS 10% early withdrawal penalty tax in the event that the non-direct transfer goes in the wrong direction. My employer offers Roth-in-plan. If so, wouldn’t that make them totally exempt from the 10% penalty when withdrawn early? any tax form I need to file when I convert my traditional IRA to Roth IRA? My gross income this year in 2018 will likely be over the $135,000 limit on account on selling an investment property which will net me over $60,000. Is it perhaps just a glitch in his software system? But if you do an indirect transfer (money first goes to you personally, then you transfer it to the Roth trustee within 60 days) the first IRA trustee may withhold 10% or more of the amount transferred. All the traffic is going the other way, as you might imagine. But of course your employer will have to show the distributions as separate amounts. I’m the only one working. I’m paying premature distribution income + penalty on the $5k distribution. Can I do Roth conversion at any age? Find out more and explore different tax strategies with Personal Capital. In this scenario, I thought we would end up paying taxes on $325 (250k – my wife’s + $75k conversion). I no longer own any traditional IRAs. Not all employers allow this. One stock is down a lot. Thank you and Seasons Greeting. BTW, you likely will have to pay tax (but not a penalty) on $23k, since that’s actually the amount of the conversion. Taxable annuity pension from work and no penalty to do that if it came up with 60,000! 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