Twists and turns in converting a traditional IRA to a Roth


Updated: Mar 10th, 2017 | |

The change of the tax laws to allow everyone to convert their traditional IRAs into ROTH IRAs in 2010 was a nice present to the tax advisor community.  The issues with this one were nearly enough to make even me, a die hard do-it-yourselfer, seek professional advice.   Instead of paying for advice, I called the IRS.  The woman I talked to in the IRA department was very helpful, seemed very credible&8211;and contradicted some the advice of the people I talked to from Fidelity (800-FIDELITY) and Schwab (800-424-5750).

The key documents I was able to find were IRS form 8606 and its instructions, and publication 590.   My discoveries / conclusions ( apply):

  1. All the IRAs / SEP / similar accounts (see IRS for specifics) for an individual need to be summed together when considering a conversion.  You can&8217;t convert the account using all post-tax dollars, without accounting for the pre-tax contributions you might have in another account.
  2. Even if you are married, filing jointly, point 1 applies.   You don&8217;t have to combine the husband&8217;s and wife&8217;s accounts together, just all of the accounts of the person that is converting.
  3. Don&8217;t intermingle tax year 2010 contributions in with the conversion.  Some people are claiming there is a loophole that allows 2010 contributions to be converted this year.   The IRS person I talked with said the conversion is intended for 2009 and older contributions&8211;mixing in 2010 contributions looks like a recipe for confusion.   The IRS person suggested that the simplest approach is to zero-out the old accounts by transferring everything (the old accounts don&8217;t need to be closed) before 2010 contributions are made.
  4. The Roth money can&8217;t be pulled out without penalty for 5 years after it is put in&8211;for my case anyway
  5. Both Fidelity and Schwab offer the same capabilities (e.g., option trading level capabilities) in both the traditional and Roth IRA.  Brokers aren&8217;t consistent on this, so be sure to ask if you&8217;re not sure if something is allowed in the IRA account.
  6. Using money from the IRA you are converting to pay taxes due to the conversion seems like a really bad idea.  For starters you will likely have to pay the 10% early withdrawal penalty.

I plan to do a total conversion, a partial conversion looks like a long term headache.

Additional resource:

  • Traditional IRA To  Roth IRA Conversion Tax Example

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Friday, March 10th, 2017 |