8.21 Converting a Traditional IRA to a Roth IRA
You can convert a traditional IRA to a Roth IRA regardless of your income or filing status. Before 2010, a taxpayer could not make a conversion if his or her modified adjusted gross income (MAGI) for the year of the transfer exceeded $100,000, and married persons filing separately were ineligible, but these restrictions were eliminated for conversions made in 2010 and later years.
Filing Instruction
A conversion to a Roth IRA is a taxable transfer, unlike a tax-free rollover (8.10) to a traditional IRA. If you converted a traditional IRA to a Roth IRA in 2012, the entire transfer must be reported as 2012 income unless after-tax contributions were made to any of your traditional IRAs (see “How to report a 2012 conversion to a Roth IRA,” below).
If you took advantage of the special two-year deferral rule that applied only to 2010 conversions, you must report the remaining half of the 2010 conversion income as a taxable IRA distribution for 2012; see “How to report deferred income from a 2010 conversion or rollover on your 2012 return,” below).
A conversion may be made by directing the trustee of your traditional IRA to make a trustee-to-trustee transfer of your IRA to a new Roth IRA trustee, or by keeping the account with the same trustee but instructing the trustee to change the registration of the account from a traditional IRA to a Roth IRA. You may also make a conversion by receiving a distribution from your traditional IRA and rolling it over to a Roth IRA; the rollover must be completed within 60 days from the time you receive the distribution.
Conversion from SEP or SIMPLE IRA.
You may also convert a SEP (8.15)to a Roth IRA. A SIMPLE IRA (8.18) may be converted to a Roth IRA if more than two years have passed since you began participation in the SIMPLE IRA.
Rollover from employer plan to Roth IRA.
The tax treatment of a rollover to a Roth IRA from a 401(k) plan or other qualified employer plan, 403(b) plan, or governmental 457 plan is similar to that of a conversion from a traditional IRA. That is, the rollover is a taxable distribution except to the extent that it is a return of your after-tax contributions, if any.
The taxable income from a rollover you made in 2010 from an eligible employer plan to a Roth IRA qualified for the two-year deferral rule for 2010 conversions. Unless you elected on Form 8606 to report all of the conversion income on your 2010 return, half of the income was reportable on your 2011 return and the other half is reportable on your 2012 return; see “How to report deferred income from a 2010 conversion or rollover on your 2012 return,” below.
Required minimum distributions (RMDs) may not be converted to a Roth IRA.
If you are age 70½ or older, you may not convert to a Roth IRA amounts that represent the required minimum distribution (RMD) from a traditional IRA (8.13). Similarly, the RMD from an employer plan (7.13) may not be rolled over to a Roth IRA. Only the amount exceeding the RMD is eligible for conversion or rollover.
Law Alert
How to report a 2012 conversion to a Roth IRA.
If you converted a traditional IRA to a Roth IRA in 2012, you have to report the conversion on Form 8606 and the entire amount must be reported as a taxable distribution on your 2012 return, except to the extent that it is allocable to after-tax contributions in all of your traditional IRAs. If you made after-tax contributions to any of your traditional IRAs and you are converting only part of your traditional IRAs, a prorated portion of the converted amount is treated as allocable to the after-tax contributions and that is the nontaxable portion of the conversion. You figure the tax-free percentage on Part 1 of Form 8606 by dividing the after-tax contributions by the sum of the year-end value of all the IRAs plus the conversion amount. Multiplying the resulting percentage by the conversion amount gives you the tax-free part of the conversion. The balance is the taxable part of the conversion. The 10% penalty for pre-age-59½ distributions (8.12) does not apply to the taxable part of the conversion.
Law Alert
If you withdrew funds from a traditional IRA towards the end of 2012 and complete a rollover to a Roth IRA in early 2013 within 60 days of withdrawal, this is treated as a 2012 conversion and not a 2013 conversion.
How to report deferred income from a 2010 conversion or rollover on your 2012 return.
If you made a conversion to a Roth IRA from a traditional IRA in 2010, you either elected on Line 19 of Form 8606 (for 2010) to report the entire taxable amount as income on your 2010 return, or you chose on Line 20 of Form 8606 to use the special two-year deferral rule, which allowed you to report half of the conversion income on your 2011 return and the other half on your 2012 return. If you chose the two-year deferral, then on your 2011 return you should have reported half of the 2010 conversion income, as shown on Line 20a of your 2010 Form 8606, as a taxable IRA distribution for 2011. The other half of the 2010 conversion income (from Line 20b of the 2010 Form 8606) must be reported as a taxable IRA distribution for 2012.
Similarly, if you made a 2010 rollover to a Roth IRA from an employer plan and you chose to use the two-year deferral rule on Line 25 of Form 8606 instead of reporting the entire taxable amount on your 2010 return, half of the income was reportable on your 2011 return and half on your 2012 return. The amount shown on Line 25b of the 2010 Form 8606 should be reported as taxable pension income for 2012.