We often receive Roth conversion questions from clients and other people who visit our blog. Below are a few of the most common questions. As we see more questions, we will continue to update this page. If you have a question, please share it with us and we will do our best to answer it!
1. Can I do Roth conversions in retirement?
Yes. While your ability to directly contribute to a Roth IRA is impacted by adjusted gross income (AGI), your ability to do Roth conversions is not. You can do Roth conversions at any time. In fact, some of your best Roth conversion opportunities might come after you have retired.
2. Can I do Roth conversions if I have no earned income?
Yes. Although you cannot directly contribute to an IRA (either traditional or Roth) with no earned income, you can do Roth conversions. Even if you’re not retired, you can do Roth conversions.
In years where you have little or no earned income (layoffs or going back to school, for example), you might actually be in a great position to do Roth conversions. The younger you are, the more you will benefit from a lifetime of compounding, tax-free investment returns.
3. Can I do Roth conversions after age 72 when I start taking RMDs?
Yes, you can do Roth conversions in a year where you also take required minimum distributions (RMDs). There is no age limit for Roth conversions. The only thing that changes is that the RMD must be made first, then any remaining distributions can be Roth conversions if you wish.
For example, let’s you were normally doing Roth conversions of $50,000 per year, throughout your 60s and early 70s, in accordance with your Roth conversion strategy. The year you turn 72, your first RMD is $30,000. The only requirement is the $30,000 RMD. After that, you can:
- Do a Roth conversion of the remaining $20,000. This would allow you to keep your current-year withdrawal taxes at the same level—based upon the $50,000 in your plan.
- Do a Roth conversion of the entire $50,000. This would allow you to empty your IRA faster, but you would need to keep an eye on your tax bracket.
- Do another option, based upon any changes you think are warranted in your Roth conversion strategy.
4. Can I do Roth conversions on inherited IRAs?
Unfortunately, you cannot. With that said, there are a couple of things worth pointing out about an inherited IRA.
- From a cash flow perspective, you can use the after-tax proceeds of inherited IRA distributions to then fund your Roth IRA contributions. Let’s imagine you’re in the 12% tax bracket, and you weren’t able to set aside any additional money this year. As long as you have earned income, you could withdraw money from your inherited IRA and contribute directly to your Roth IRA. If you wanted to contribute $6,500, you’d probably want to withdraw about $7,400, set aside the difference for taxes (the exact amount at the 12% bracket is $7,386), then make the contribution.
- It is possible to inherit a Roth IRA. In that case, a Roth conversion would be unnecessary.
- With the passing of the SECURE Act, most IRAs inherited after January 1, 2020 are subject to a 10-year distribution rule (with some exceptions carved out for ‘eligible designated beneficiaries’). For people who might end up forced into a higher tax bracket, you may consider tax planning to see how you can keep your taxes as low as possible.
5. Can I do Roth conversions more than once?
Yes. You can do Roth conversions as many times as you want, with no limit. In fact, there are many cases in which you may want to create a multi-year Roth conversion plan. This is especially true if you’re interested in tax-efficiency in your Roth conversions.
We’ve written a plethora of articles that focus on Roth conversions, which you can read here.
6. Can I do Roth conversions multiple times in one year?
Yes. As mentioned before, you can do Roth conversions as many times as you want, even in the same year. This might be good for people who decide:
They know they want to convert a certain amount, but they might want to do more after they run a tax projection
The stock market might be headed lower, and they’re interested in Roth conversions in a down stock market.
Although a Roth conversion is technically considered a rollover, it does not count as a rollover for the IRA ‘One Rollover Per Year Rule,' as long as your Roth conversion meets the rollover requirements (see Question #16 below).
7. If I do a Roth conversion, can I move the money back into my IRA?
This is known as a recharacterization.
Unfortunately, you cannot recharacterize a Roth conversion made after December 31, 2017. Once the money from your Roth conversion is in your Roth IRA, it cannot go back.
8. Are there income limitations for Roth conversions?
There are no income limitations for Roth conversions.
However, there are income tax considerations, and it’s worth considering what the right tax bracket might be for your strategy. The higher your taxable income, the higher your tax bracket you’re likely to be in. And the higher your tax bracket, the more you will pay to convert the same amount of money.
For example, someone in the 22% tax bracket will pay $11,000 in taxes to make a $50,000 Roth conversion. Someone in the 12% tax bracket will pay $6,000 to make the same conversion.
9. What types of accounts can I do Roth conversions from?
Traditional IRAs (which include rollover IRAs), SEP IRAs, SARSEP IRAs, and SIMPLE IRAs can all be converted to a Roth IRA.
For SIMPLE IRAs, there is a 25% penalty on any funds withdrawn within the first 2 years of the plan participation. After the 2-year period, you can make any Roth conversions without penalty.
You can also convert any funds from employer-sponsored retirement plans (like a 401k or 403b), if those funds are eligible for distribution or rollover. Although there are federal regulations that provide some general guidance, many of the details will be covered in the plan’s summary plan document (SPD). For example, an employer cannot limit your ability to withdraw (or rollover) vested assets after you have retired or left the company.
10. How do I pay taxes on Roth conversions?
You can pay taxes on Roth conversions in one of two ways:
- Have your account custodian withhold taxes from your IRA withdrawal and remit them to the IRS on your behalf. While this might result in less money ending up in your Roth IRA, it’s an option for people who don’t have outside money for the higher tax bill.
- Pay the taxes yourself with outside money. This is a more tax-efficient option, as it allows you to keep more of your IRA contributions (which are limited) inside your IRA.
You can read more in this article we wrote about how to pay taxes when doing Roth conversions.
11. Do I have RMDs on my Roth conversions?
For your Roth IRA, there are no RMDs, or required minimum distributions. RMDs are only for non-Roth retirement accounts.
If you inherited a Roth IRA before January 1, 2020, then you may be subject to RMDs. If you inherited a Roth IRA on January 1, 2020 or later, then most non-eligible beneficiaries will be forced to withdraw the money by the end of the 10th year after the owner’s death.
12. Is there a deadline for Roth conversions?
There is no deadline for Roth conversions. Roth conversions are completely voluntary, so there is no associated deadline.
However, the income tax associated with a Roth conversion will be calculated in the tax year that the Roth conversion was completed.
13. Is there a deadline for the taxes on my Roth conversions?
Normally, the deadline for individual tax returns in a given tax year is April 15 of the year following the tax year being reported. In some cases, if April 15 falls on a weekend or holiday, the deadline will be imposed on the next business day. For example, the 2017 tax return deadline was April 17, 2018 because April 15 fell on a Sunday, and April 16 fell on Emancipation Day, which was a legal holiday in Washington DC.
While you can file for extensions beyond the tax return filing deadline, any estimated taxes must be calculated and paid on or before the filing deadline. Any unpaid taxes may be subject to penalties and interest based upon IRS determination.
14. What tax forms are involved in a Roth conversion?
You can expect the following forms for each year in which you do a Roth conversion:
1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc): Form 1099-R is issued by your account custodian to report the distribution from your retirement account.
For Roth conversions, you’ll want to see a couple of things:
Box 2b (Taxable amount not determined). This will probably be checked as this transaction must be reported by the custodian, but the tax calculation is the taxpayer’s responsibility.
Box 7 (distribution code) is marked either Code 2 (if you are age 59 ½ or younger) or Code 7 (if you’re age 59 ½ or older). This means that your distribution might be taxable, but not subject to the 10% early withdrawal penalty.
8606 (Non-deductible IRAs): Form 8606 is used to report Roth conversions. Even though this form is titled for non-deductible IRAs, you (the taxpayer) will report your Roth conversions on this form, either in Part I (if you made nondeductible contributions AND Roth conversions, like a backdoor Roth conversion) or Part II (Roth conversions only).
5498 (IRA Contribution Information-Info Copy Only): Form 5498 is not used for your tax return, but it is issued by your account custodian for informational purposes. You can read more about Form 5498 in this article.
To summarize, your custodian should issue Form 1099-R and Form 5498. The taxpayer is responsible for filing Form 8606 with their tax return.
15. Does my accountant need to know about my Roth conversions?
Yes. Usually, this will be a question that is asked in your accountant’s questionnaire. However, if you don’t tell your accountant that your Form 1099-R was a Roth conversion, he or she might not know to file Form 8606, which is a required part of your tax return.
16. What is the best way to do a Roth conversion?
According to the IRS, you can do a Roth conversion in one of three ways
60-day rollover-You receive a distribution check from the first IRA and contribute it to a Roth within 60 days. If you hold your check for more than 60 days, then it may be considered a fully taxable distribution that cannot be re-deposited into your Roth IRA. Because you, the taxpayer, are fully responsible for meeting the 60-day requirement, many tax professionals might recommend that you use a trustee-to-trustee or same trustee transfer to avoid this.
Trustee to trustee-You can ask the financial institution holding your traditional IRA to directly transfer the funds in your IRA to a Roth IRA at another institution. Different institutions have different processes, so you may need to consult your financial institution for guidance on your IRA.
Same trustee transfer-Similar to the trustee to trustee transfer, except both accounts are held at the same institution.
17. I have an account with nondeductible IRA contributions in it. Can I do a Roth conversion tax-free?
If your IRA has only nondeductible IRA contributions, then those contributions can be converted tax-free.
However, if you’ve held nondeductible IRA contributions for several years, then it’s likely that you have a combination of contributions and investment earnings on those contributions. In that case, Question 18 applies.
18. I have an account with nondeductible AND deductible IRA contributions in it. Can I do a Roth conversion tax-free?
Not fully tax free. Your nondeductible contributions will be converted tax free, but you must pay ordinary income tax on any deductible IRA contributions as well as all earnings in the account.
In this case, one of two things will happen:
- You will convert 100% of the account balance. Your nondeductible IRA contributions will not be taxed, but you will pay ordinary income tax on the earnings.
- You convert part of the balance. In this case, you would convert a pro-rated amount of the contributions (not taxed) and earnings (taxed).
For example, let’s say that you have $50,000 in an IRA. $25,000 was from non-deductible contributions and $25,000 was from deductible contributions and earnings.
50% of your IRA is considered after-tax. This means taxes have already been paid and won’t be assessed again (non-deductible contributions).
50% of your IRA is considered pre-tax. This means that when the money eventually comes out of your account, it will be taxed at ordinary income rates.
You want to convert $10,000 to your Roth IRA. Using the above percentages, you would pay taxes on $5,000 of that Roth conversion, since ½ of your conversion amount is tax-free, and ½ is fully taxable.
This calculation is done on Form 8606-Nondeductible IRAs.
19. Does the 1-time per year rule apply to Roth conversions?
20. What is the 5-year rule and how does it apply to Roth conversions?
There are two 5-year rules when it comes to Roth IRAs. Only one applies to Roth conversions.
Roth conversion 5-year rule: Treasury Regulation 1.408A-6, Q&A-5(b) states that the 10% penalty applies to an any Roth conversion amount that has been withdrawn within 5 tax years of the deposit, if there is not already an exemption under IRC Section 72(t).
A tax year is defined as having started on January 1st of the year that the Roth conversion was made. In this regard, ‘5 tax years’ usually means ‘4+ tax years,’ but probably not 5 full years. Treasury Regulation 1.480A-6, Q&A-5(c) states that this applies to each Roth conversion amount separately.
Since IRC Section 72(t) applies, this rule is not applicable to anyone who is age 59 ½ or older.
Roth contribution 5-year rule: This applies to the earnings on Roth contributions (and conversions). In order for earnings to be considered tax-free, they must be withdrawn under one of these circumstances:
After age 59 ½
After death (to a beneficiary)
After a disability (according to IRC Section 72(m)(7)
Additionally, the first contribution (not rollover) to a Roth IRA must have been made at least 5 tax years before the withdrawal. This means that even if you are age 59 ½, you may be subject to an early withdrawal penalty if your first contribution was made less than 5 tax years prior to withdrawal.
However, a tax year is defined as January 1 of the tax year for which your IRA contribution was made. Therefore, a contribution made on April 10, 2018 for the 2017 tax year would be considered to have been made on January 1, 2017. If that is the first contribution, then the 5 tax-year rule would be applied to the January 1 date, not April 10.
Unlike the conversion rule, this only applies to the first contribution. Once the five years have passed, this rule does not apply again.
21. If I do Roth conversions but pass away with money left in my IRA, do my children have to pay taxes?
No. If your children inherit a Roth IRA, then they do not pay taxes. We’ve written an article for people interested in paying taxes on Roth conversions so their beneficiaries don’t have to.
While your children do not have to pay taxes on an inherited Roth IRA, the SECURE Act IRA distribution rules would apply for any IRAs inherited after December 31, 2019. This means that unless the beneficiary is an eligible designated beneficiary, most inherited Roth IRAs must be completely distributed no later than 10 years after the end of the year in which the owner died.
For example, Bob Smith had a Roth IRA. He died on May 1, 2020, and his son, Bob Junior, inherits the account. Unless Bob Junior is considered an eligible designated beneficiary, his account would have to be completely distributed by December 31, 2030. How Bob Junior does this (whether he takes it all at once, a little each year) is not regulated, as long as the account is completely distributed by the end of the 10-year period after Bob Senior’s death.
22. Can you do Roth conversions within a trust?
If you are the person who established an IRA (either traditional or Roth), then you cannot have an IRA inside a trust while you are alive. The IRA (Roth or traditional) is registered in the name of the account owner. A trust can be named the beneficiary of an IRA, after the account owner passes away. However, the IRA then becomes an inherited IRA, and Roth conversions cannot be done from non-spousal inherited IRAs.
23. Can I reverse a Roth conversion?
Unfortunately, no. The Tax Cuts and Jobs Act of 2017 eliminated the ability to reverse Roth conversions (also known as recharacterizations). The only recharacterizations that are allowed are for Roth contributions (see Question 24).
24. How do I recharacterize Roth contributions?
According to the IRS, you can tell your financial institution to transfer the amount of the contribution (plus earnings) to a different type of IRA (either a Roth or traditional) in a trustee-to-trustee transfer or a different type of IRA with the same trustee. As long as this is done by the due date of that year's tax return (including extensions), then you can treat the contribution as if you originally made it to the second IRA (and ignore the first IRA contribution).
25. Can I make a Roth contribution in the same year as I do a Roth conversion?
Perhaps. However, the Roth contribution limits (for both contribution amounts and AGI levels) still apply. If your tax situation would otherwise allow you to make Roth contribution limits, then doing Roth conversions has no impact on your ability to do so. Conversely, Roth contributions have no impact on your ability to do a Roth conversion. However, the amount of your Roth conversion might raise your AGI to a level so that it exceeds the AGI limits, so you'll want to be careful.
26. How does my decision on when to take Social Security impact my Roth conversions?
Although Social Security is treated differently from other income sources, it is considered when calculating your income tax. The earlier you decide to start taking Social Security, the sooner you will have to account for this in your Roth conversion strategy. If you delay taking Social Security until age 70 (but no later, since your benefits do not grow beyond that age), you can allow for more room within your desired tax bracket.
27. What if I need to withdraw money from my IRA for living expenses?
That's perfectly normal. In retirement, that's what your IRA is for--to support your living expenses. Here are a couple of considerations:
- Taxes for withdrawals are the same as for Roth conversions. Assuming that you meet one of the IRS' requirements for exceptions to the 10% penalty rule, withdrawals from your IRA are taxed exactly the same as Roth conversions. For example, if you are 60, and withdrew $10,000 from your IRA, you would pay the same amount of taxes as if you had converted $10,000.
- The 10% penalty doesn't always apply to people under 59 1/2. While most people are familiar with the 59 1/2 rule, there are other exceptions (see the above chart). One thing to keep in mind--the 10% penalty exceptions are different for IRAs and qualified plans (such as 401ks, 403bs, etc.).
- You may want to adjust your Roth conversion strategy accordingly. For example, let's imagine that your Roth conversion strategy showed $20,000 in Roth conversions this year. However, you decide that you need $10,000 in living expenses. You can do one of two things:
- Lower your Roth conversions accordingly. $10,000 in withdrawals and $10,000 in Roth conversions would still leave you with $20,000 in taxable distributions--the same as the original plan.
- Do both, and account for the increase in your strategy. $10,000 in withdrawals and $20,000 in Roth conversions would leave you with $30,000 in taxable distributions, or $10,000 more than originally planned.
27. Do Roth conversions count as an RMD?
No. You can take Roth conversions even after you have to start taking RMDs (see Question #3, above). However, you must satisfy your RMD requirement before doing any Roth conversions.
Also, since you cannot do Roth conversions from an inherited IRA, you definitely can't use them to satisfy your RMD requirement (for inherited IRAs established before January 1, 2020).
Interested in reading more about Roth conversions? Check out Lawrence Financial Planning’s Roth conversions articles page. Here you’ll find lots of articles that we’ve written about Roth conversions. You can also download our Step-by-Step Roth Conversion Guide for free.
And if you’re ready to take the next step and work with a financial planner, you can learn more about how we work with clients right here.