(The following will make that clear!) But you can still do another conversion in 2017 since there are no limits on conversionss. Unfortunately, they had both gained a few pennies before conversion $6,500.17 and $5,500.19. You won’t have to pay them on either Social Security income or IRA distributions. thank you for any helpful advice!! Thank you very much for the article. If one stock goes up significantly and one stock goes down significantly, and if they are in seperate ROTH IRA accounts (converted from a single traditional IRA account in kind), you can recharacterize the stock/account that has gone down significnalty back into the traditional IRA account so that you are not paying taxes on money you no longer have. I want to convert/rollover this IRA to an existing ROTH IRA. Check with your divorce attorney. I re characterized the contribution into a traditional IRA. are all worthwhile issues to resolve, but I have yet to see a definitive calculation of how to optimize the conversion of a pot of money (say $1 million) over a time period (say 10 years from age 62 to 72) assuming a given life expectancy (say 100 years old to be on the safe side). A Roth IRA conversion can help you avoid taxes later in life when you would really benefit from some tax-free income, but don’t jump in blindly. Total value will be $7,000 of after-tax contributions and we will assume no growth. My income is not an issue (low) :(. My wife and I both began saving with IRAs this year (February 2017). Why are there $40K in “after-tax contributions” in a Traditional (vs ROTH) IRA? close the account and move all of the money into my Roth IRA account), will the pro-rata rule still apply? The risks of getting it wrong are too great to go with general information. But if you’re worried about land mines discuss it with a CPA. I know I will have to pay the taxes but will there be the other 10% penalty because I didn’t put that money in an retirement account in my name before 60 days or does her roth ira count to not get penalized. All third party trademarks, including logos and icons, referenced in this website, are the property of their respective owners. All of those things would favor a Roth over an IRA. Is there a way to now convert that Roth IRA to a SEP IRA without penalty? Wouldn’t he just annually roll over however much he wants to convert to a TIRA and then immediately convert to an RIRA, and then pay taxes on the entire conversion? I am now non resident and living in UK and have no USA income as of this year. I think I can ignore the 401k and 457b balances for tax purposes, but I’m not sure about the SEP Ira? Converting all or part of a traditional IRA to a Roth IRA is a fairly straightforward process. You’ll report the conversion to the IRA on Form 8606 when you file your income taxes for the year of the conversion. But please, Please, PLEASE discuss this with a CPA first. To clarify – the 10% penalty would only apply to the portion of the traditional IRA that is not rolled to the Roth, correct? Insightful article. Unfortunately, I deposited the $5,500 for 2016 tax year into the Roth account about 9 months ago and am now trying to undo it prior to the April 18 deadline. @walt Unfortunately, not. Hi Mike – Since you have both pre-tax and after tax contributions your tax liability will be less than would be the case if it was all pre-tax amounts. These are the main benefits of a Roth IRA that set this account apart from a traditional IRA, but there are plenty of others. Here is a question about the execution of pro-rata rule. Thanks for your time. But, is a Roth IRA conversion really a good idea? That’s a noble goal but, once again, the Backdoor Roth IRA only makes sense in situations where tax savings can truly be realized. Thanks so much for the helpful article and continued follow up in the comments. I have been reducing my Traditional IRA by withdrawing about $10,000 each year and moving it to a taxable account without having to pay any taxes. Does this strategy make sense? Could you list the Pros an Cons of going through with this conversion? But it will depend on other income sources, if any. Regarding Conventional-to-Roth conversions, My wife and I both max out our employer 401ks and our combined incomes exceed the Roth contribution limits. This kind of conversion can certainly be lucrative over time, but you should definitely weigh all the pros and cons before you decide. Hi Allan – You’re confusing 401k/IRA conversions with contributions. "About Form 8606: Nondeductible IRAs." Hi Carol – No, you can do a partial conversion (or the whole account if you like). We both opened Vanguard accounts and I put in $6500 and she put in $5500 and we started with Traditional IRAs. Hi Shawn – You’ll have to pick up the 2015 IRA contribution conversion in 2016, since that’s when it actually happened. Thank you! If you have a non-Roth IRA at Schwab, call a Schwab investment professional at 866-855-5636 to start the conversion process. Is there anything that would prevent me from doing this, assuming I’m willing to pay tax on the money when I roll it over later? Getty. Hello Jeff, Me again, I think I have got the gist of the situation here: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions Feel free to address or delete my other post as you see fit. My rollover has larger sum than hers and I will take RMD in 9 years. But please discuss this with a CPA before proceeding. You can convert your wife’s account later. Great article! When using TurboTax to estimate my 2017 tax liability it is adding a $550 tax penalty probably due to inadequate withholding. Roth conversion rules allow you to convert cash or other assets in any of the following three ways: ... ($7,000 if age 50 or older) to a Roth IRA in 2019. Not sure about the four year spread on paying the tax on the conversion, and think it’s not likely. -Todd. This all seems like a time-consuming petty loophole that the IRS has in place. You would have to be within the top 1% of income earners, then drop to the 10% bracket-only (in retirement) for a Traditional IRA to outweigh the tax benefits of the Roth upon withdrawal. I rolled over $10,000 from my Employer 401K plan to a brockerage IRA rollover account. 3. Hi Dan – There are no lifetime limits, only a limit of one conversion per year. Hi John – According to this article Distributions After a Roth IRA Conversion, you should be OK to take the withdrawal without incurring either regular income tax (because it was paid at conversion) or the penalty (because the purpose of the withdrawal is an accepted exemption). Thank you. The reason being is that I may not need my IRA money to live on and would like to bypass the RMDs and allow the account to grow for a very long time. Hi, Very helpful article. We are in our 30s. I currently contribute the maximum of $5500 per year to my Roth IRA. They may not, and if they do, they might not accept them each year. Yes, you can do a partial conversion from the 401k. So new IRA will be used in calculating your pro-rata basis in the amount of the conversion, even though the account isn’t part of the conversion. Perhaps more importantly we need to know if we should do it. 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). The 10% penalty tax doesn't apply if you are over age 59½., Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year.. However since you’re six years from having RMDs, that means that you’re over 59 1/2, and no early withdrawal penalty tax will be due. Hi Tara – You can roll the current Roth accounts over to other accounts. I made non-deductible traditional IRA contributions for 2013 and 2014 in April 2014. A Roth IRA conversion means you pay tax on your savings in the year you move your money from the traditional retirement account to the … It seems there is sort of a tipping point where the combination of RMD’s, pension income, investment income and Social Security income put relatively wealthier folks into higher tax brackets and make more of their Social Security income taxable. Yes, you will have to pay ordinary income tax on the conversion, whether it is from a traditional IRA or a 401(k) – except for the portions that were contributed after-tax. What exactly is the definition of “future?” Does it mean that in June 2016 I can rollover a pre-tax IRA into a 401k (thus I have no more pre-tax IRA money), then in November 2016 I make a $5500 Traditional IRA contribution, and then convert that $5500 into Roth, and that will be okay? If not, roll it over to a traditional IRA. You’ll have less going into the Roth, but the tax liability will be lower due to the withholding so it won’t be a total loss. There’s too much going on to give a blanket answer. 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? However, I heard that the IRS will use my other 2 IRA’s (which are substantial) to use as a tax basis for my Roth conversion. assuming that I will still be working next year thanks. Hi Jeff, thank you for informative article. There is a foreign earned income exclusion (FEIE) that would offset most/all of the double taxation that would occur, but nonetheless, a US citizen reports all income (including Roth conversions). My presumption is the income/conversion should all be reported in 2017, correct? Can we rollover these Roth accounts into other Roth accounts opened via etrade or another online service? If that is correct, can I still do another “tax year 2017” contribution/converison between traditional and Roth? Therefore, in Turbo Tax, you put it under an IRA distribution which adds to your income similar to declaring interest received or any other source of income. I’m considering rolling over a previous employers’ 401K comprised of approximately $20,000. I have a healthy 401K. But there’s no way I can tell you online how much you should allocate to the conversion, or if you should even do it at all. Thus, under this treatment of the tax, the Traditional IRA paid the same after tax as the Roth. Or do they blend because they both exist in 2017, even though technically don’t overlap? Am I limited on the number of partial Roth conversions from a traditional IRA in a 12 month period? The rules, and even the availability, for these plans may vary considerably from one … Great article. The tax consequences won’t change, since both the RMD and the conversion balance will be subject to tax. Thanks! This will be important since an attorney in your state may be aware of such a plan specific to your state. I am thinking of contributing $6500 to a NONDEDUCTIBLE IRA for 2014 and then converting that amount to a ROTH IRA immediately. I think the only wrinkle is that I can’t withdraw any of the converted funds until five years after the first conversion. Here is what I’d like to accomplish – For 2016 tax year, I am eligible to contribute to a Roth IRA, so I plan to open and contribute the max to a Roth IRA prior to the April cutoff date. You decide to pay taxes now on your contribution (or conversion) in exchange for tax-free earnings down the road. But I’m confused on your last comment. The good news is that since you started the plan only in 2014, its probably mostly made up of your contribution (See: https://www.irs.gov/uac/Newsroom/Tax-Rules-on-Early-Withdrawals-from-Retirement-Plans). 1 If you aren't able to contribute to a Roth IRA because of the income limits, 2 a Roth conversion of eligible retirement accounts is another way to have a Roth account. Does this conversion qualify as earned income for these purposes ? Here’s where the IRS pro-rata rule applies. This rollover/transfer was done ~6 months ago between institutions: Edward Jones to Vanguard. Rollover IRA’s: Consists entirely of pre-tax contributions. I am almost 59, work for local government, and hope to retire soon after I turn 60. APPARENTLY, in August of 2005 I accidentally rolled over my ROTH IRA into a Rollover IRA (which, for all intents and purposes, as I understand it) is the equivalent of a Traditional IRA . I have balances in, and continue to contribute to the pre and post. I’ve decided to stop contributing to my IRAs and instead contribute to the 401k and TSP. If so, what amounts exactly are subject to penalty or taxation? I have several old employer 401ks (pre-tax contributions), a traditional IRA (nearly all made with post-tax contributions) and a current 401k (pre-tax contributions) I’d like to convert some of my traditional IRA to a Roth IRA, but does the pro rata rule look at my old employer 401ks too? This type of investment strategy intends to help you save money on taxes later at the cost of higher taxes now, in the year you make the conversion. One advantage Roth IRAs have over traditional IRAs is you won't have to take required minimum distributions—something to think about if you hope to leave the money to your heirs. This deadline applies even if: a) you did not request an extension to file your 2013 tax return, and b) you file your return on or before April 15, 2014.” The dates are just examples. Internal Revenue Service. A few days later, I converted that full amount into the Roth IRA. I did some research and found nothing, even from checking with a couple of state-sponsored benefit plan sites, and nothing doing. She makes about 40k and I make 65k annually. Converting a $100,000 traditional IRA into a Roth account in 2019 would cause about half of the extra income from the conversion to be taxed at 32%. As far as the timing, you’re looking for a strategy to limit taxes. trigger the IRA rollover containing my 2017 contributions to my Roth account. I’m trying to figure out how to do both this year and in future years. Also about how much should we expect to pay for the service. Thanks for your valuable time. You’ll have to pay tax one way or the other, but the rollover to a Roth will provide you with more options later. Thanks in advance. I rolled it all over to a traditional IRA several years ago. And, as we already mentioned, you’ll have to pay income taxes on converted amounts regardless of which rule you choose to follow above. You can convert it to a Roth. I file taxes as unmarried with no dependents. Your second question: …if I rolled over an IRA to a Roth now (in March) for last year (2015), would that income count for 2015 or 2016? If you fund your 2016 IRA in 2016, you can also do the Roth conversion for tax purposes for 2016. Can I now move the past 3 years and this year’s contribution to a ROTH account? The information here is tremendously helpful! My question is whether there is an age limit for the conversion, or whether I can go on converting for rest of my life? Thanks! However, you must first take your annual required minimum distribution (RMD) from your traditional IRA for the year before doing the rollover. I hold a Roth IRA and am looking to convert just this year’s (2016 tax year) contribution to a Traditional IRA (both with the same firm). Say it differently, if my Roth conversion is on January 1, do I use the IRA basis on January 1 or on December 31? So we can only make non-deductible contributions to a IRA. I recently began a new job and my employer offers a ROTH 401k and ROTH TSP with 5% matching into each (for a total of 10% matching). Hello! Should I just pay an excise tax for the amount over what I was allowed to contribute, or can I just withdraw the overage? I have used it to roll over funds from 401K from my previous employer. This is probably an excellent time for you to do the conversion for that very reason. But Mike Kitces argues that they aren’t necessarily permitted by the IRS. Appreciate your help with my understanding of the application of the pro-rata rules and potential workarounds. For starters, here’s the quick and easy break down for withdrawing from a Roth IRA – penalty free: 1. , Hi I have read your articles and appreciate them very much. Are there any pitfalls I need to be aware of? If he is in the 22% income tax bracket, he will owe $26,400 in income taxes, or $120,000 x .22. Thanks! I assume that RIRA means rollover IRA? All articles I’ve read treat conversions as a one time event, when for a large IRA, multiple conversions may be beneficial to avoid a higher tax bracket. Will the trustee send me a statement telling me the exact amount of the income over the past 12 years or do I have to figure this out myself? I have 457 (Deferred Plan) at work, with all the contributions pre-tax. Then rollover the $80K IRA into my 401K in June 2015 and convert my non-deductible $5500 cash traditional IRA into Roth IRA in July 2015. I converted an IRA to a Roth IRA and paid taxes last year on the amount of the converstion. Hi Jonathan – You’re getting hung up on a common misunderstanding. There’s a slight typo in the equation. A Roth conversion cannot be used to circumvent the 10% early withdrawal penalty. The property sale pushes you into a higher tax bracket, and that will raise the tax cost of the Roth conversion. I don’t think so Sherri. No, you don’t need to be earning money to do the conversion, since the funds are already in the plan. Can I get around that by selling IRA funds into a bank account and then funding the Roth from the bank account funds? How is this best handled? I just set up a solo 401k that has both a Roth and tax deferred component. I now want to roll over the Roth 401k dollars from my former firm’s plan into an IRA. I only see options for four payments, but the income is not spread through the year. Meanwhile your Roth contributions won’t be taxable, since there was no tax deduction when they were taken. 1) Yes you would pay tax on the trustee-to-trustee transfer. That applies to all retirement plan considerations. Just be sure that you don’t pay the tax estimate out of the proceeds of the IRA conversion. My question is solely about how much I can convert in any year. I also have a non-deductible Traditional IRA with T Rowe Price (TRP) which I would like to convert in its entirety to T Rowe Price Roth IRA. Look at our current interest rates – no one thought they could stay this far below average for as long as they have. It appears like I’m going to be double taxed on the $11,000–because I paid income tax on it and then I’m going to pay again on it because it is showing as distributed funds.