Ask Kim
The New Roth Rollover Rules Explained
Kimberly Lankford answers readers' questions about the new rules that take effect in 2010.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
September 11, 2009
I've been getting a ton of questions from readers about the new Roth IRA rollover rules that take effect in 2010, when anyone will be able to convert their traditional IRA to a Roth regardless of their income. (You can make the switch now only if your adjusted gross income is less than $100,000, whether married or single.) To help you understand how the new rules work, here are the answers to several key questions I've received.
How do you calculate how much money will be taxed when you make the conversion?
The calculation is easy if you've made only tax-deductible contributions. In that case, you'll have to pay taxes on the entire balance when you convert a traditional IRA to a Roth IRA. But the money can grow tax-free after that (see Why You Need a Roth IRA for details). If you've made both tax-deductible and nondeductible contributions to your traditional IRAs, then your tax bill will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. If your total balance is $100,000, for example, of which $20,000 represents nondeductible contributions, then 20% of any conversion would be tax-free.
When do you have to pay the tax bill?
If you convert your traditional IRA to a Roth in 2010, you can spread the tax bill over two years. You report the first half of the conversion on your 2011 tax return (which you file in April 2012) and the balance on your 2012 return. If you're moving a large amount of money, however, you may want to start making quarterly estimated tax payments in 2011 to avoid an underpayment penalty.
The income limit for Roth IRA conversions is permanently eliminated, but the special opportunity to spread the tax bill over two years applies only to conversions made in 2010.
It's worthwhile to make the switch only if you don't have to tap the IRA for cash to pay the taxes. So even though you have a while before the taxes are due on the conversion, you may want to start setting aside some money over the next year or so to cover the tax bill.
What happens if you convert the traditional IRA to a Roth but then discover you don't have enough money to pay the tax bill? Or what if the account goes down in value after you make the switch?
You'll get a chance to change your mind. If you roll over your traditional IRA to a Roth in 2010, then you'll have until October 15, 2011, to "recharacterize" your conversion and switch the account back to a traditional IRA. You can then reconvert the traditional IRA to a Roth later -- you must wait at least 30 days and until the next calendar year to convert it again. You may end up with a smaller tax bill if your account value has shrunk since your original conversion. For more information, see Undoing a Roth Conversion.
Do you need to have earned income to convert a traditional IRA to a Roth?
No. Although you need earned income to contribute to an IRA, you don't need it to convert a traditional IRA to a Roth.
Reader Comments (16)
Posted by: Richard Vivilecchia at 09/11/2009 05:00:10 PM
The June issue of Kiplinger Tax Letter indicates the rules for converting after tax portion in 401K to a Roth IRA are different than for an IRA. The after tax portion can be rolled over in a lump sum without triggering an income tax bill on the pretaxed portion, a much more liberal ruling.
Posted by: JD at 10/28/2009 08:45:53 AM
When evaluating whether or not to convert a Traditional IRA to a Roth IRA, wouldn't tax brackets play a critical role in the decision making process? If one is currently in the higher brackets and would be facing a huge tax liability, relative to being in a lower bracket at retirement age, even if spread out over two years, wouldn't it make sense to remain in the traditional IRA?
Posted by: hal lauth at 11/05/2009 07:27:58 PM
Kim, On the subject of converting traditional IRA monies to my Roth, Your answer to a previous question responds that one does not have to have earned income to do that. Great; is your source an IRS agent, or a ruling, or code section by them?? Thanks. Hal
Posted by: ingrid at 11/19/2009 01:56:51 PM
I have an inherited non-spouse IRA - can I convert this to a Roth?
Posted by: RONEL at 11/30/2009 04:31:22 PM
IF YOU ARE NOT INCLUDING THE 2010 CONVERSION ON YOUR TAX RETURN FOR 2010 BUT IN 2011 AND 2012, DOES THAT MEAN YOUR TAXES ARE FIGURED ON 2011 AND 2012 INCOME? IF SO THIS SEEMS VERY TRICKY AS YOU HAVE TO PREDICT YOUR INCOME IN THOSE YEARS. IT DOESN'T MAKE SENSE TO ME.
Posted by: paul weddle at 01/01/2010 01:13:46 PM
What about those who are currently taking mandatory withdrawals from traditional IRA. Can they avoid further mandatory withdrawals on part or all of their traditional IRA by converting to a roth? Thanks.
Posted by: Carole Kukowski at 01/05/2010 08:40:20 PM
I took a RMD in January of 2009 from my inherited IRA, not knowing that there would not be any RMDs for 2009. Is it too late now, in January of 2010, to put the money back into my IRA, that is, to undo my withdrawal from 1/13/09?
Posted by: Jon J. at 01/14/2010 06:04:42 PM
My wife has an inherited IRA but no other deductible IRA account. If I fund a non-deductible traditional IRA for her and then convert it immediately to a Roth, does the inherited IRA come into play for taxing the conversion?
Posted by: Mark at 01/22/2010 10:43:31 PM
Can we rollover a traditional IRA to a Roth if the contributions occurred during 2001? If we rollover before April 15, 2010, can we pay the tax on our 2009 tax return? What will be the "basis" of the rolled over dollars in the Roth? Contributions to a Roth can be withdrawn after 5 years, the earnings cannot be withdrawn. So, if I rollover in 2010, what is my basis - the entire amount or just the original contributions? Also, if I rollover in 2010, when can I withdrawal my basis? Do I have to wait 5 years for the entire amount of the rollover? Your guidance would be most appreciated.
Posted by: Steve L at 01/23/2010 01:53:19 PM
I am over 70 1/2 and only receive SS and Pensions. Am I correct that I can convert a standard IRA into a Roth without having w-2s.? I would use a trustee to trustee ?
Posted by: Robin at 01/24/2010 08:52:48 PM
My husband has been retired and has retirement income. I am still working. I know that I can put $6,00 into a ROTH for myself. He is over 50 like me. How much can he put into a Roth?
Posted by: wrs at 01/26/2010 05:12:46 PM
If real estate is distributed from a traditional IRA on 12/31/2009 and tax is paid on its fair market value can this same real estate be rolled over to a Roth IRA in 2010 regardless of AGI?
Posted by: Kim Lankford at 01/27/2010 05:15:07 PM
JD and Ronel, this is Kim Lankford with answers to your questions. Both of you are correct that tax brackets make a big difference, both in your decision whether or not to convert your traditional IRA to a Roth now and when deciding whether to pay the tax bill on the conversion when you file your 2010 taxes or to spread it over 2011 and 2012. My colleague, Rachel Sheedy, wrote a great article in Kiplinger's Retirement Report about some of the key issues to consider when deciding whether or not to convert your traditional IRA to a Roth, and how your current and future tax brackets enter into your decision. See "The Complexities of Roth Conversions" at www.kiplinger.com/features/archives/krr-the-complexities-of-roth-conversions.html. (You can cut and paste this url into your browser.) Ronel, you're right that a special perk of converting your traditional IRA to a Roth in 2010 is that you can spread the tax bill over 2011 and 2012. This can help a lot of people who need extra time to come up with the money to pay the bill (so they don't have to tap their IRA account -- and possibly pay a penalty -- to pay the taxes). But the tax bill could be higher if tax rates increase after 2010. Also, you may want to consider paying the tax bill with your 2010 return if you're in an unusually low tax bracket now -- if you were out of work for part of the year, for example -- but expect to be in a much higher bracket by 2011 (if you can afford to pay the taxes with money from outside of your IRA). Hope this helps.
Posted by: Kim Lankford at 01/27/2010 05:16:56 PM
Hi Paul, this is Kim Lankford. I have good news for you: Even though you still need to take your required minimum distribution from your IRA in the year you convert the account to a Roth, you won't need to take any RMDs from the account after that -- there are no required minimum distributions from Roths. Hope this helps!
Posted by: Kim Lankford at 01/27/2010 05:27:29 PM
Hi Robin, this is Kim Lankford. I have good news for you, too. You usually need to have earned income to be able to contribute to a Roth IRA. But if you're still working but your husband is retired, you can contribute to a spousal Roth IRA on his behalf. You cannot contribute more than your earned income for the year -- so you'd need to make at least $12,000 for the year to be able to contribute the maximum $6,000 for each of you (since you're both 50 or older). And you your joint income must still fall within the Roth IRA limits, which means that you can only contribute to the Roth IRAs for 2009 if your joint income was less than $176,000 for the year (the contribution amount gradually starts to phase out if you earned more than $166,000). You still have until April 15, 2010, to contribute to the IRAs for 2009. The income limit rose to $177,000 for 2010 Roths. But even if you don't qualify to contribute to a Roth, you can contribute to a traditional IRA then convert it to a Roth. (See the column above for details about how to calculate the tax on the conversion.)
Posted by: Kim Lankford at 01/27/2010 05:32:44 PM
Hi everybody, this is Kim Lankford. I notice that quite a few people posted questions about this column over the past few days. I've answered several of them in the comments box, but also wanted to let you know that I did a big column last week answering a ton of questions about Roth conversions. See "FAQs on the New Roth Conversion Rules" at www.kiplinger.com/columns/ask/archive/faqs-on-the-new-roth-conversion-rules.html. Hope this helps!