Questions and Answers on Roth IRA Conversions
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows for the conversion of your traditional IRA into a Roth IRA. Here are some pertinent questions and answers about the conversion rules:
Q: Is there an income limit to convert a traditional IRA to a Roth IRA?
A: No, there are no income limits. Beginning in 2010, all taxpayers have the option to convert their traditional IRAs to Roth IRAs.
Q: What if the market goes down after the conversion has been made and taxes on the higher account balance have already been paid?
A: There is a provision called “recharacterization,” which will allow you to convert back to a Traditional IRA. You will receive a tax refund on any taxes paid on the conversion.
Q: When do I have to pay taxes if the conversion to a Roth IRA is made in 2010?
A: There are 2 choices for paying taxes on the conversion in 2010:
- In 2010, you pay taxes on the full amount that has been converted to a Roth IRA.
or
- You pay no taxes on the amount converted in 2010; instead you pay one-half of the amount of taxes in 2011 and the other half in 2012.
Q: Can taxes on the conversion be paid over three years (2010, 2011, and 2012)?
A: No.
Q: What is the tax rate if I choose to pay the Roth IRA conversion taxes in 2011 and 2012?
A: The tax rates will be based on the years in which you are paying the taxes. This means that you will pay taxes based on your income in 2011 and taxes based on your income in 2012.
Q: Can I contribute to a traditional IRA in 2010 and then convert it to a Roth IRA the same year?
A: Yes.
Q: What is the maximum amount in a traditional IRA that I can convert to a Roth IRA?
A: There is no limit.
Q: Is it reasonable to convert to a Roth IRA if I plan to leave the Roth IRA to my children?
A: A Roth IRA is tax-sheltered for future growth, and those who inherit it would not have to pay taxes when they withdraw the money.
Q: Is it ok to convert to a Roth IRA if I plan to leave the Roth IRA to a charity?
A: It would not be necessary to convert to a Roth IRA because both traditional and Roth IRAs can be passed to a charitable organization tax-free.
Q: Can I convert my minimum distribution from my traditional IRA to a Roth IRA?
A: No, you cannot convert the distribution. However, you can convert the balance that remains in the traditional IRA to a Roth IRA.
Q: Can I convert funds from my 401(k) or 403(b) to a Roth IRA?
A: If you are working at the company where you have your 401(k), you cannot convert the funds to a Roth IRA. However, if you no longer work at that company, you can convert the funds to a Roth IRA.
Q: Is it ok for my spouse to convert a traditional IRA to a Roth IRA if I decide not to convert to a Roth IRA?
A: Yes, it is ok. You will pay taxes only on the amount converted.
Q: What will happen if Congress decides to repeal this act?
A: If the act is changed, participants would probably be grandfathered into the new rules.
Source: Gene Walden, Minneapolis Star Tribune, Sunday, November 1, 2009
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