New Roth IRA Conversion Opportunity

Unbiased Financial Information Provided by Financial Wisdom.

Since 2010, individuals with Traditional IRAs have had the option of converting all or part of their funds in a Traditional IRA to a Roth IRA regardless of how much they earn.  This is an important tax and estate planning opportunity that many may find attractive.


Traditional and Roth IRAs have identical contribution limits and both provide tax advantaged accumulation while funds are within the accounts.  Both allow for contributions up to age 70 ½.  Generally, both types had penalties for withdrawals taken before age 59 ½.

Contributions to Traditional IRAs can be tax deductible if one is not eligible to participate in their employer’s qualified retirement plan or if their income was below a certain level.  Contributions to a Roth IRA are not tax deductible and no contributions could be made if one’s income was above certain levels.

The two largest differences are how and when funds could be taken out of the accounts.  Distributions from a Traditional IRA are taxable and distributions from a Roth IRA are tax free.  Traditional IRAs require that distributions begin once one reaches age 70 ½ while there is no distribution requirement for Roth IRAs.

There was a provision that enabled one to convert from a Traditional IRA to a Roth IRA, but only if one’s modified adjusted gross income was less than $100,000.  In addition, taxes were generally due on the amount converted with the tax return for the year of conversion.

The Changes

Beginning in 2010, the $100,000 modified adjusted gross income limitation for conversion of a Traditional IRA to a Roth IRA is eliminated.  However, taxes are due on the tax return for the year in which the conversion takes place.

The Opportunity for Conversion

Eliminating the income limitation means that almost everyone can make the conversion.  By converting, you have to pay taxes now on the value of the Traditional IRA, but the Roth IRA has no required minimum distributions and future distributions are income tax free.  For those that can pay the current tax with funds from other sources, that do not need to take distributions soon (or ever), and that like the idea of future distributions being tax free, this may be a very attractive opportunity.

Issues to consider include:

  • Can you pay the tax on conversion with funds outside the IRA?  If you can not, conversion is less likely to be appropriate.
  • Do you anticipating needing distributions from your IRA soon to maintain your financial lifestyle?  The longer the funds can remain building up tax free in a Roth IRA, the greater your long term benefit from conversion.
  • Will your income tax bracket be lower when you anticipate taking distributions?  If you expect your tax rate to go down, paying a higher current rate of tax on the conversion reduces the benefits of conversion.
  • Are you anticipating leaving a large IRA to your heirs?  If so and you can pay the tax on conversion from other funds, making the conversion can significantly increase the benefits for your heirs.  They would begin receiving tax free distributions based on their life expectancy when they inherit the Roth IRA.

Another Opportunity for Tax Advantaged Retirement Savings

The old rules restricted contributions to Roth IRAs for those with income levels above certain levels.  While contributions to Traditional IRAs could be made with no tax deduction, there was still required minimum distributions beginning at age 70 ½.

Under the new rules, one can contribute up to $5,500 of earned income (or $6,500 for those ages 50 and above) to a Traditional IRA and then convert the Traditional IRA to a Roth IRA.  The result is that funds end up in a Roth IRA compounding on a tax free basis with no required minimum distributions.  This may be attractive for those wanting to maximize their retirement savings and enjoy tax free compounding of the earnings.


The new rules for converting a Traditional IRA into a Roth IRA can provide long term benefits but at the cost of paying taxes earlier.  Evaluating this opportunity requires analysis and thought.  As with most tax opportunities, there is no substitute for advice from a qualified tax professional if you are considering making the conversion.

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