Individual Retirement Accounts » Roth IRAs

Roth IRA Conversions

Roth IRAs may be funded with "converted" amounts; that is, they may be funded with dollars that are converted from a Traditional IRA.

If an IRA is converted into a Roth IRA, taxes are paid on what has been converted because it is considered a distribution from a tax-deferred plan. There is, however, no 10% penalty for early withdrawal.

Conversions cannot be made if an individual's AGI for the year exceeds $100,000 (for single and joint filers). No conversions can be made for individuals who are married filing separately regardless of modified AGI.

If an individual wants to convert money from a qualified plan (QP) or 403(b) to a Roth IRA, they must first move to a Traditional IRA and then move the funds to a Roth IRA. Funds cannot be directly moved from a QP, 403(b), or governmental 457 Plan to a Roth IRA.

Conversions and the 5-Year Period

The money that is converted to a Roth IRA must remain in the account for 5 years in order to avoid penalties

For conversions into a Roth, there is a separate 5-year period for each conversion into an account.

Failed Conversions

A failed conversion occurs when a person converts money from a Traditional IRA to a Roth IRA and they were not eligible to do so (having over $100,000 AGI).

If the conversion is not recharacterized, the conversion will be treated as a regular contribution to the Roth IRA and, thus, an excess contribution subject to the excise tax to the extent that it exceeds the individual's regular contribution limit.