Details on eligibility to convert some or all of a traditional retirement account to a Roth IRA.
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Eligibility for a Roth conversion was greatly simplified when Congress repealed the $100,000 income limitation as of 2010. There are still some important details concerning conversion eligibility, though.
What’s eligible for conversion
The general rule here is that if you’re able to take a distribution that’s eligible for a rollover, you’re also allowed to do a conversion.
- Employer plans. Distributions from qualified employer plans such as 401k or 403b accounts can be converted (rolled) directly to a Roth IRA if eligible for rollover to a traditional IRA. Note that certain distributions (such as hardship distributions) can’t be rolled over, and these cannot be converted.
- SIMPLE IRAs. A SIMPLE IRA can be converted to a Roth IRA, but only after you’ve participated in a SIMPLE IRA Plan for the employer maintaining that plan for at least two years. Before that, the only rollover permitted for your SIMPLE IRA is to another SIMPLE IRA.
- Inherited IRAs. Conversions are not permitted for an IRA you inherit from a person other than your spouse. When you inherit a traditional IRA from your spouse you’re permitted to elect to treat this IRA as your own. If you make this election, you can convert the IRA to a Roth IRA.
- Rollover within 12 months. Normally you aren’t allowed to do more than one rollover from or to the same IRA within a 12-month period. This rule applies to Roth IRAs, too, but with a special exception. For purposes of this rule you’re permitted to disregard a conversion from a traditional IRA to a Roth IRA, even if the conversion takes the form of a rollover.
Here are some other rules worth noting in connection with conversion eligibility:
Roll what you received
If the rollover distribution from your traditional IRA was entirely in cash, then your rollover contribution to your Roth IRA must also be in cash. You don’t have to show that it’s the same cash, but you’re not allowed to use the cash to buy property and then roll the property into the Roth IRA.
If you received a property distribution from your traditional IRA, then you must roll exactly the same property to your Roth IRA — or cash proceeds from the sale of that property. A rollover or conversion is the only time you’re allowed to contribute property to a Roth IRA.
Converting part of your IRA
There’s no rule that says you have to convert your entire IRA at once. You can convert part of an IRA if you choose. Unfortunately though, you can’t choose to roll only the nontaxable part of a traditional IRA that contains taxable and nontaxable money.
Example: You have a traditional IRA with a balance of $10,000, which includes $6,000 of nondeductible contributions. If you roll $6,000 of this IRA to a Roth IRA, you’re required to treat that rollover as coming 60% from nondeductible contributions and 40% from other money — the part that’s taxable.