Conversions

A Roth conversion moves eligible money from a Traditional IRA or an eligible employer-plan distribution into a Roth IRA. This can include a Traditional SEP IRA, or a Traditional SIMPLE IRA after its two-year participation requirement for a rollover to a non-SIMPLE Roth IRA. The pre-tax portion is generally included in income for the year of the source distribution; properly allocated after-tax basis is not taxed again. Future qualified Roth IRA distributions are federally tax-free.

No. The conversion income restriction ended in 2010, and there is no annual dollar cap on otherwise eligible conversions. That does not make every distribution convertible: required minimum distributions (RMDs) and other ineligible amounts cannot be converted, a nonspouse beneficiary cannot convert an inherited IRA, and employer-plan distributions must satisfy the plan's distribution rules and rollover requirements. Regular Roth IRA contributions still have income and annual contribution limits; conversions do not use that regular-contribution allowance.

Generally, the previously untaxed portion is ordinary income. For an IRA conversion, Form 8606 allocates after-tax basis across your combined Traditional, Traditional SEP and Traditional SIMPLE IRAs under IRC §408(d)(2), using year-end values and the year's relevant distributions and conversions. You cannot choose only the basis in one IRA while ignoring your other pre-tax IRAs. An employer-plan rollover uses the plan's separate basis and reporting rules; Form 8606 is not the form for reporting a direct 401(k)-to-Roth IRA rollover.

There is no universally best amount. Compare the incremental tax and other income-related costs of different conversion sizes, including the option not to convert. Filling a tax bracket is one planning approach, not a rule or a guarantee of savings. Taxable conversion income can also raise Medicare income-related premiums (IRMAA), generally using income from two years earlier. Spreading conversions across years may help, but the result depends on tax rates, other income, benefits and available cash for taxes.

For a calendar-year taxpayer, each conversion has a separate five-tax-year period starting January 1 of the conversion year. Before age 59½, a withdrawal allocated to an amount that was taxable when converted can face a 10% additional tax if that period has not ended, unless an exception applies. Roth IRA ordering rules apply: regular contributions first, then conversions and rollovers by year, oldest first, with each year's taxable portion before its nontaxable portion; earnings last. At age 59½, the age exception removes this conversion-related additional tax. Earnings still have separate qualified-distribution requirements.