Conversion Preliminaries

By Kaye A. Thomas
Current as of February 7, 2018

Initial thoughts on converting a traditional IRA to a Roth IRA.

You can get into a lot of complicated analysis regarding a conversion of a traditional IRA to a Roth IRA. Here are just a few preliminary points you should keep in mind.

Think it through

We used to say, “When in doubt, convert,” because you could undo a conversion that turned out to be unwise. The 2017 tax law did away with the ability to undo post-2017 conversions, so the new advice is, “Think it through.” A conversion will still often be a good move, but you’ll want to consider all the issues carefully, because this move is now irrevocable. In particular, make darn sure you’ll have enough cash available to pay whatever tax you’ll owe on the conversion.

Three ways to convert

There are three ways to convert a traditional IRA to a Roth IRA:

  • You can take a distribution from your traditional IRA and, within 60 days, transfer the money or assets you received to a Roth IRA.
  • You can have the trustee for your traditional IRA transfer money or assets directly to a new trustee with whom you’ve set up a Roth IRA (a “trustee-to-trustee transfer”).
  • You can have the trustee for your traditional IRA transfer funds from the traditional IRA to a Roth IRA maintained by the same trustee. If you convert the entire IRA, the trustee may simply redesignate the IRA as a Roth.

In each of these cases, the tax law permits you to transfer assets other than cash to the Roth IRA provided that they are the same assets you received from the traditional IRA. The first method involves the most risk because it gives you a chance to miss the 60-day deadline or mess up some other way.

Meeting the deadline

To meet the deadline for a conversion in the current year, you need to have the money or assets distributed from your traditional IRA by December 31. If you do that, you can complete the conversion by transferring the money or assets to the Roth IRA after the end of the year and still have it count as a conversion for the current year. This approach may help people who are running up against the deadline for conversion — but be sure you complete the conversion in a timely manner or you’ll simply have a large taxable distribution and nothing to show for it.

It’s not all or nothing

Another preliminary point: you don’t have to convert your entire IRA. You can convert part, if you want. If your hangup is that conversion of your entire IRA looks like too much to swallow, consider a partial conversion. See Partial Conversions.

Eligibility

At one time the tax law said you couldn’t do a Roth conversion if your income was over $100,000 or if you were married filing separately. These limits no longer apply. For a discussion of other eligibility rules, see Conversion Eligibility.