Slott Report Mailbag: All About Roth IRA Conversions

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This special edition of The Slott Report Mailbag answers several of the common Roth conversion questions we receive – from the beginning “conversion conversation” to the actual conversion process. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

How do I know if I can convert my employer plan funds to a Roth IRA?

Thanks for all that you do!

Seth

Answer:
All funds in traditional IRAs, SEP IRAs, and employer plans such as 401(k)s are eligible to be converted to a Roth IRA. Funds in a SIMPLE IRA can also be converted AFTER the SIMPLE account has been open for two years. A conversion before that date will be subject to a 25% penalty tax on the amount withdrawn AND the funds are not eligible for transfer to any other type of plan except another SIMPLE. To do a conversion of employer plan funds, you must be eligible to take a distribution from the plan.

2.

I just found out I was ineligible to make a Roth conversion. Is there anything I can do now to correct the error? I probably should have read a few articles here instead of just blindly trusting my financial advisor.

Joe

Answer:
You might still have the Roth recharacterization option. The funds can be recharacterized to a traditional IRA up to October 15 of the year after either the year of the conversion or the year for which the contribution is made. You must notify both the Roth IRA and the traditional IRA custodians that you are doing a recharacterization. A net amount is recharacterized. Gains or losses on the account for the time the funds are in the account that are attributable to the contribution/conversion must also be recharacterized. The funds must be moved in a trustee-to-trustee transfer back to an IRA. Once this is done, the funds are treated as though they had always been in the IRA.

3.

My company plan has the option of converting my retirement plan funds to a Roth 401(k). My financial advisor has also talked about converting some or all of that money to a Roth IRA. Which one is better for my retirement?

Jane

Answer:
The “which one is better” question is a very individual question that can only be answered by you in tandem with your financial team. However, as part of Roth Conversion Week, Jeffrey Levine examined the advantages and disadvantages of converting funds to a Roth IRA or Roth 401(k). Click here to read the article. That should lay out a general plan which can be used to determine your best course.

This article is part of Roth Conversion Week at The Slott Report. Come back all week long for insight and analysis on Roth conversions, the benefits of tax-free planning, the possible pitfalls involved and more. Click here to view all articles.