2012 Roth IRA Conversions

The IRS made significant changes to conversion rules starting in 2010.

In the past high income earners with incomes over $100,000 were not allowed to convert to a Roth IRA. Their incomes also kept them from contributing to a Roth IRA.

Starting in 2010 the income cap for conversions has been removed. Now everyone, including high income earners, can convert to a Roth IRA whenever they want as long as they pay the appropriate taxes.

2010 Special Conversion Tax Rules

The taxes for conversions to a Roth IRA can be spread out over the following two tax years if you convert in 2010. The IRS is allowing individuals to spread out the income tax increase rather than paying it all at once. However, any conversions done after December 31, 2010 will not get this privilege.

Comments (7)

Last year I contributed the full amount to a 401k, and earned too much to contribute to a ROTH. I have a nondeductible (post-tax) IRA I would like to contribute to in tax year 2011, then convert it to a ROTH in 2012. Since I already paid taxes on the money, do I need to pay taxes again? And is the 8606 form all I need to submit to the IRS?

If you've already paid taxes on your Traditional IRA, you will not need to pay taxes on your conversion. Note that if you make any withdrawls after a Roth IRA conversion within five years, you may be subject to penalties. Please check with a tax professional for more details and for the specific forms.

Question: I have after tax contributions (approximately 3%) as a part of my (traditional) IRA. In addition I have set up A Roth IRA. Can I transfer the after tax amounts in my traditional IRA to my Roth IRA without creating a taxable event?

The answer is "Perhaps," but this is a complicated area without a lot of guidance from the IRS. Please consult a financial advisor for more information.

The amount that will not be taxed will be the basis (total of all non deductible contributions) divided by the total of all traditional IRAs multiplied by the amount converted. See form 8606 that you will have filed when you made your contributions.

If I rollover money from a 401k into a ROTH IRA would it be considered a contribution, and would I be able to withdraw funds without a penalty?

A Roth rollover like you described would almost certainly owe taxes on the conversion. There wouldn't be any fees, but you would have to pay taxes on the rollover amount.
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