Broker Check

Basics of Roth IRA Conversions

If you are like many Americans, you are probably saving for retirement through a government sponsored plan like an Individual Retirement Account (IRA) or 401K. Contributions to these accounts are before-tax, so when you withdraw money from them, those distributions will be subject to taxation. However, while contributions to Roth IRAs are taxed, withdrawals are not. Savvy financial planning can include both of these accounts, as well as structured transfers from one to another, called conversions.

Today, we will be looking at the basics of conversions to a Roth IRA and answering common questions.

<b>What Is a Roth Conversion?</b>

What Is a Roth Conversion?

A Roth Conversion involves moving money from a pre-tax retirement account (IRA, 401k, etc) into a post-tax retirement account (Roth IRA). When you move money from a traditional retirement account into a Roth IRA you will be taxed for each dollar you transfer. These monies are considered “earned income” in the year you make the conversion. In other words, as if you earned it that year, like your paycheck.

How Many Roth Conversions Are Allowed Per Year?

Although there is no limit on the number of IRA to Roth conversions per year, the 60 Day Rollover rules do apply, which limits the number of rollovers (not transfers) to one per year (365 days, not calendar year). Be aware, each conversion has its own five-year clock, so converted funds withdrawn prior to the 5 year exclusion period ends are subject to the 10% early distribution penalty if the Roth IRA owner is under 59 ½ at the time of the withdrawal.

How Can I Estimate My Tax Liability on an IRA Conversion?

The estimated tax liability is based on two things, the taxable income generated by the conversion and your subsequent tax rate. To estimate how much will be taxed, you need to know which of two types of contributions you made to the traditional IRAs (all of them, not just the one you're converting).

  1. Deductible Contributions are contributions deducted from your gross taxable income in the tax year you made these contributions
  2. Nondeductible Contributions, which are contributions you did not deduct from your taxes. These contributions are what is known as "basis" in the traditional plans and can be referred to as the basis in the conversion process to a Roth IRA.

Are There Income Limits on a Roth Conversion?

While there are no income limits on conversions to a Roth IRA, there are income limits on direct Roth IRA contributions. A good financial planner can help you decide how much to directly contribute and how much you should place in a traditional IRA account.

What Types of Retirement Accounts Are Roth IRA Convertible?

Most individual retirement accounts may be converted to Roth IRAs. These can include not just the traditional IRA that you set up for yourself, but also any qualified employer plans, including 401K accounts, 403(b)s, and governmental 457(b)s. These may all be eligible for conversion and you should consult a professional before doing any conversions from these plans, especially if you have unusual employment circumstances.

Do I Have to Convert 100% of My Retirement Account Assets?

The quick answer? No. It is your money and your decision as to what you wish to convert to a Roth IRA. However, there may be tax advantages that you receive when you do a conversion and a good financial advisor may be able to help you reduce paying taxes when you are ready to start living off of your retirement accounts.


Professional, personalized financial planning can help you avoid unnecessary taxes and tax penalties, but everyone's financial situation is different. We recommend a consultation about your own financial station as well as finding the right plan to reach your goals. Give us a call today for a custom financial planning consultation.