Stortz and Associates

Tax tips

August 23, 2010

Watch out for special rules when making a Roth conversion

Making a Roth conversion this year? Be aware that not all your retirement funds can be converted.

Why? In order to be eligible for a Roth conversion, your funds first have to meet the eligibility requirements for a "rollover." For example, required minimum distributions — which are again mandatory in 2010 — are specifically excluded from being rolled over.

That means the current year distribution you have to take from your traditional IRA (once you're age 70½) cannot be converted into a Roth. Instead, you need to withdraw your RMD first. If you accidentally convert amounts you're required to withdraw under the RMD rules, a penalty will apply.

Other special rules include:

  • SIMPLE accounts. Amounts transferred out of your SIMPLE during the first two years of participation in your employer's plan are not eligible for a Roth conversion.
  • Inherited IRAs. You can convert accounts you inherit from your spouse to a Roth, but not accounts you inherit from others.
  • Substantially equal periodic payments. Have you been using this special rule to take distributions from your traditional IRA without incurring the 10% early withdrawal penalty? Though the account from which you're making withdrawals can be converted to a Roth, the payment itself is ineligible.

Unsure of which retirement accounts you can or should convert to a Roth during 2010? We're here to help you make the right choice; call us.

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