Roth Conversions (Q & A)

Feb 2016


Q         Hi Mr. Bloom:

I read your articles all the time and attend your lectures at Plymouth
District Library.  Thanks for doing it.  I enjoy your practical advice and outlook.  I was thinking about converting my Roth and what shows up in tonight’s paper but an article on it?  One question:  other than the obvious tax implication as you outlined, is there any limitation based upon your income?  If my annual income is too high to contribute to my Roth, can I still do the conversion?

Thank you so much.



A         Dear Cheryl:

First, thanks for the kind words.  I’ve always considered myself lucky that I get to write this column and speak at places like the Plymouth Library.  When I speak at a library I always meet some incredibly nice people like you-so Thank You!


With regard to a Roth IRA conversion, one of the beauties is that there is no income limitation.  There are income limitations when it comes to new contributions into a Roth IRA, but no income limitations when it comes to converting.  Therefore, anyone can convert their traditional IRA into a Roth IRA.  The one caveat to that rule is that if you are over 70½ and thus, mandated to take minimum required distributions, the amount of your required minimum distribution is not eligible to be converted.  You can however, convert anything above that number but not the required minimum distribution.


The key issue from a tax standpoint is that by converting money into a Roth IRA, you don’t want to throw yourself into a higher tax bracket.  It is always important to remember that the amount of money you convert from a traditional IRA into a Roth IRA is subject to ordinary income tax.  One of my rules to determine whether a Roth conversion makes sense or not is to confirm that converting it won’t put you into a higher tax bracket.


Obviously, the markets have taken a significant hit since the beginning of the year.  As I mentioned in a previous column, when markets are in retreat, you and I as investors, ought to look for opportunities.  One of those opportunities is in converting traditional IRAs into Roth IRAs.  Just think, with the market temporarily down, you’re able to convert at a lower tax cost.  Then, when the market rebounds, since the money will be in the Roth IRA, all that gain will eventually be tax free to you.  Therefore, when markets are retreating one thing everyone should look at doing is taking advantage of Roth conversions.  That doesn’t mean Roth conversions are for everyone; however, it certainly pays for most of us to explore the opportunity.


In some situations, after someone converts to a Roth IRA, they realize they may have made a mistake.  For example, your taxable income can be higher than you expected, you don’t have the cash on hand to pay the additional tax liability, or the value of your investments in the converted Roth IRA has declined.  In those situations you can reverse the Roth IRA conversion.  This process is known as a re-characterization.  You don’t have to re-characterize the entire amount converted; rather, you can do it for just a portion of the amount converted.   The key is that the re-characterization must be completed by the last date including extensions for filing your tax return.  Typically, that would be October 15.  Therefore, if you did a Roth conversion now, you would have until October 15, 2017 to re-characterize the transaction.


Like everything, when it comes to taxes it is important to dot the I’s and cross the T’s.  Therefore, whether you’re going to do a Roth conversion or a Roth re-characterization, it is important that you work with your IRA custodian so that there are no issues.


Good luck!