A:

If your modified adjusted gross income (MAGI) is $100,000 or less and you are not married filing separately, you may initiate a taxable conversion of a Traditional IRA to a Roth IRA. You can do a direct trustee-to-trustee transfer or receive a distribution of your traditional IRA and then roll it over into the Roth IRA; the rollover must be completed within 60 days from the time you receive the distribution.

So, when is the best time and method of doing this? Since a conversion to a Roth IRA is a taxable event, the best time to convert is in a year when you expect to be in a low federal income tax bracket or when the value of the traditional IRA is down due to poor performance.

Figure the tax due on the conversion (treated as ordinary income) and then weigh whether you have sufficient funds outside the plan to pay the tax, and where there is substantial tax due on the conversion, whether you want to give up the future income that would be earned on the funds used to pay the tax. You can also reduce you tax bill by doing smaller conversions spaced out over several years. Once a conversion is complete, the funds grow tax-free in the Roth IRA, provided you stay within the rules established for Roth IRA accounts. (Learn more about Roth conversions in our article: The Simple Tax Math of Roth Conversions.)

(This question was answered by Steven Merkel.)

RELATED FAQS
  1. Is there a limit on how much I can move from my IRA to my Roth IRA?

    There is no limit on the amount that can be converted from your Traditional IRA to your Roth IRA. As you may already know, ... Read Answer >>
  2. I am 59 (not 59.5) and my husband is 65. We have participated in a SIMPLE IRA with ...

    During the first two years after a SIMPLE IRA is established, assets held in the SIMPLE IRA must not be transferred or rolled ... Read Answer >>
  3. How can I fund A Roth IRA if my income is too high to make direct contributions?

    Roth IRAs are not available to you if you are a high income earner - unless you use the following strategy. Read Answer >>
  4. Earnings within a Roth IRA are tax free, so are these earnings included in the modified ...

    There are two possible answers to this question, depending on whether or not the distribution from the Roth IRA is qualified.Earnings ... Read Answer >>
  5. How do I roll over a Simple IRA to a Roth IRA?

  6. What is the Roth IRA 5 year rule?

    Learn more about the Roth IRA five-year rule and the requirements that allow for tax-free withdrawals before five years have ... Read Answer >>
Related Articles
  1. Retirement

    5 Reasons to Convert a Roth To a Traditional IRA

    Here's a quintet of cases when the traditional IRA trumps the Roth version.
  2. Taxes

    5. Converting a Traditional IRA to a Roth IRA

    Avoiding these five common tax mistakes can really pay off on your way to retirement
  3. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
  4. Options & Futures

    Roth IRAs: Contributions

    Funding an IRA A Roth IRA can be funded from several sources: Regular contributions Spousal IRA contributions Transfers Rollover contributions Conversions Recharacterizations Roth IRA Regular ...
  5. Saving and Spending

    Is a Roth IRA Conversion Right for Your Client?

    Here are the factors advisors and their clients need to consider when it comes to Roth IRA conversions.
  6. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  7. Retirement

    6 Reasons Not to Recharacterize Your Roth IRA

    If you're thinking of recharacterizing your Roth IRA into a traditional IRA account, here are six compelling reasons why you should reconsider.
  8. Retirement

    Roth IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  9. Professionals

    Roth IRA

    Roth IRA
  10. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
RELATED TERMS
  1. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  2. Roth IRA

    An individual retirement plan that bears many similarities to ...
  3. Ordering Rules

    The order in which Roth IRA assets are distributed. Assets are ...
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  6. Qualified Distribution

    Distributions made from a Roth IRA that are tax and penalty free. ...

You May Also Like

Trading Center