Conversion Preliminaries

Keep these points in mind

By Kaye A. Thomas
Updated January 20, 2008

Initial thoughts on converting a traditional IRA to a Roth IRA.

You can get into a lot of complicated analysis regarding a conversion of a traditional IRA to a Roth IRA. Here are just a few preliminary points you should keep in mind.

When in doubt, convert

Every person who is wavering over the decision whether to convert should be aware of the following:

The only way to keep your options open for the current year is to convert by December 31.

Here's why:

If you convert by December 31, you have until October 15 of the following year to undo that conversion without paying any tax or penalty.
If you fail to convert by December 31, you've blown your chance to convert in the current year. You can make a regular contribution to a Roth IRA for the current year any time until the return due date (April 15 of the following year). But December 31 is the date the curtain falls on conversions for the current year.

I'm not suggesting that you should wait until later to think through this decision. If you go through an unnecessary conversion and de-conversion, you'll waste time and perhaps pay unnecessary fees to your IRA provider. But if you have a significant amount of money at stake and truly feel you need more time to make the decision, the only way to buy that additional time is to convert before the end of the year.

Three ways to convert

There are three ways to convert a traditional IRA to a Roth IRA:

You can take a distribution from your traditional IRA and, within 60 days, transfer the money or assets you received to a Roth IRA.
You can have the trustee for your traditional IRA transfer money or assets directly to a new trustee with whom you've set up a Roth IRA (a "trustee-to-trustee transfer").
You can have the trustee for your traditional IRA transfer funds from the traditional IRA to a Roth IRA maintained by the same trustee. If you convert the entire IRA, the trustee may simply redesignate the IRA as a Roth.

In each of these cases, the tax law permits you to transfer assets other than cash to the Roth IRA provided that they are the same assets you received from the traditional IRA. The first method involves the most risk because it gives you a chance to miss the 60-day deadline or mess up some other way.

Meeting the deadline

To meet the deadline for a conversion in the current year, you need to have the money or assets distributed from your traditional IRA by December 31. If you do that, you can complete the conversion by transferring the money or assets to the Roth IRA after the end of the year and still have it count as a conversion for the current year. This approach may help people who are running up against the deadline for conversion — but be sure you complete the conversion in a timely manner or you'll simply have a large taxable distribution and nothing to show for it.

It's not all or nothing

Another preliminary point: you don't have to convert your entire IRA. You can convert part, if you want. If your hangup is that conversion of your entire IRA looks like too much to swallow, consider a partial conversion. See Partial Conversions.

Eligibility

A final preliminary point is to determine whether you're eligible to convert your IRA to a Roth IRA. There's no reason to spend time analyzing the benefits of a move that isn't available to you. For years before 2010, two types of people are ineligible. First, you can't convert to a Roth IRA if your modified adjusted gross income is greater than $100,000. For a married person, this means joint modified adjusted gross income. Modified AGI includes certain types of non-taxable income but does not include income from the Roth IRA conversion itself. The other category of person who can't do a Roth IRA conversion before 2010 is anyone who's married and filing separately. For details see Conversion Eligibility.