Bush > Roth IRA Conversion

| May 12, 2015

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Stacy Bush, Valdosta Today Finance Contributor

With the lure of tax-free distributions, Roth IRAs have become increasingly popular retirement savings vehicles. According to the Investment Company Institute, 19.1 million U.S. households (about 15.6%) owned Roth IRAs in 2013.

What are the general rules for funding Roth IRAs?
There are three ways to fund a Roth IRA–you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan.

In general, you can contribute up to $5,500 to an IRA (traditional, Roth, or a combination of both) in 2015 ($6,500 if you’ll be age 50 or older by December 31). However, your ability to make annual contributions may be limited (or eliminated) depending on your income level (“modified adjusted gross income,” or MAGI.

Unlike a traditional IRA, you can contribute to a Roth IRA even if you’re 70½ or older. However, your contributions generally can’t exceed your earned income for the year (special rules apply to spousal Roth IRAs).

Important changes since 2010
Prior to 2010, you couldn’t convert a traditional IRA to a Roth IRA (or roll over non-Roth funds from an employer plan to a Roth IRA) if your MAGI exceeded $100,000 or you were married and filed separate federal income tax returns.

The Tax Increase Prevention and Reconciliation Act (TIPRA), however, repealed the $100,000 income limit and marital status restriction, beginning in 2010. What this means is that, regardless of your filing status or how much you earn, you can convert a traditional IRA to a Roth IRA. (There’s one exception–you generally can’t convert an inherited IRA to a Roth. Special rules apply to spouse beneficiaries.)

And don’t forget your SEP IRAs and SIMPLE IRAs. They can also be converted to Roth IRAs (for SIMPLE IRAs, you’ll need to participate in the plan for two years before you convert). You’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after you convert.

How do you convert a traditional IRA to a Roth?
Converting is relatively simple. You start by notifying your existing traditional IRA trustee or custodian that you want to convert all or part of your traditional IRA to a Roth IRA, and the custodian/trustee will provide you with the necessary paperwork.

You can also open a new Roth IRA at a different financial institution, and then have the funds in your traditional IRA transferred directly to your new Roth IRA. The trustee/custodian of your new Roth IRA can give you the paperwork that you need to do this. If you prefer, you can instead contact the trustee/custodian of your traditional IRA, have the funds in your traditional IRA distributed to you, and then roll those funds over to your new Roth IRA within 60 days of the distribution. The income tax consequences are the same regardless of the method you choose


Stacy Bush has practiced independent financial advising in the Valdosta area for 14 years. Growing up on a farm in Donalsonville, Georgia, he is keen to the financial needs of South Georgia and North Florida families. Stacy and his wife, Carla, live in Valdosta with their four children. You can submit questions about this article to askstacybush@lpl.com

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