Ask Kim
Roth IRA Rules
Kim Lankford responds to more questions about converting a traditional IRA to a Roth and opening an account for a child.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
January 7, 2010
Since 2010, anyone has been able to convert a traditional IRA to a Roth. But there are a number of rules you’ll want to know when making the switch.
SEE ALSO: The Basics of Roth IRAs
How do I go about converting my traditional IRA to a Roth now that it’s 2010?
Anticipating a slew of conversions, most IRA administrators will make it easy for you to convert your traditional IRA to a Roth. Some (including Fidelity, Vanguard and T. Rowe Price) also offer handy tools on their Web sites to help you calculate your tax bill before you make the switch. Also see our Should I Convert My IRA Into a Roth IRA? calculator.
First, you'll need to open a Roth IRA account if you don’t have one already. Then you'll fill out a conversion form to switch money from the traditional IRA to a Roth (some firms let you open the account and move the money all on the same form). You'll have to specify how much of the traditional IRA you want to convert, how the money should be invested in the Roth, and whether you want taxes withheld from the amount you move to the Roth. It's best if you can say "no" to withholding and pay the tax bill out of non-IRA funds. If you dip into the IRA to satisfy the IRS, you'll owe tax and, if you're younger than 59 1/2 an early-withdrawal penalty on the amount. If you make the conversion in 2010, you can spread the tax bill over 2011 and 2012.
If you're switching your IRA from one mutual fund company, brokerage firm or bank to another, you'll fill out most of the paperwork with the new IRA administrator, which can walk you through the process. But it’s a good idea to give the old firm a heads up so that the transaction will go smoothly.
My wife and I have traditional IRAs that we intend to convert to a Roth. We made the maximum contributions to them in 2009. Can we also make contributions to the IRAs for 2010 before we convert? My income is too high to qualify for Roth contributions.
You sure can. Even though there is still an income limit to contribute to a Roth IRA in 2010 -- your modified adjusted gross income must be less than $120,000 if single or $177,000 if married filing jointly -- the $100,000 income limit to be able to convert a traditional IRA to a Roth disappeared in 2010, giving everyone a back door into a Roth. You can now make your contributions to a traditional IRA and immediately convert them to a Roth IRA.
I haven't made IRA contributions over the past few years because I earned too much to contribute to a Roth and didn't qualify to make tax-deductible contributions to a traditional IRA. Now I wish I would have contributed to a nondeductible IRA anyway so that I could have converted it to a Roth. Is there anything I can do to catch up?
You still have until April 15, 2010, to contribute up to $5,000 to an IRA for 2009 (or $6,000 if you're 50 or older). You can also make your contributions for 2010, then convert the money to a Roth.
In your column in the January 2010 issue of Kiplinger's, you stated that "if you already have a traditional IRA, you can't simply put $5,000 into a nondeductible IRA and then move it tax-free to a Roth." Please explain again. I had contributed to a deductible IRA for many years, then stopped putting money into that account when I was no longer eligible for the deduction. I make too much money to contribute to a Roth, but I have been contributing to a nondeductible IRA for many years. I want to convert all of this into a Roth in 2010. I also want to contribute to the nondeductible IRA in 2010 and convert it into a Roth because I make too much to contribute directly to a Roth. Why can't I do this in 2010? My wife is in the same predicament.
Now that it's 2010, you can convert your traditional IRAs to a Roth regardless of your income. What I was referring to was the tax treatment of the conversion -- if some of your IRA contributions have been tax-deductible and some have been nondeductible, you can't just cherry-pick the nondeductible contributions to convert and avoid paying taxes.
Instead, the amount taxable on the conversion is based on the ratio of nondeductible contributions to the total balance in all of your traditional IRA accounts. If you have $10,000 in nondeductible contributions, for example, and the total balance is $12,000, then 83% of any conversion would be tax-free.
I am 68 with no earned income. Under the new law, can I convert a traditional IRA to a Roth and make contributions from investment income? If so, what are my limitations?
You don't need to have earned income to be able to convert a traditional IRA to a Roth. But you do need to have earned income to make new IRA contributions.
If you don't work but your spouse does, he or she can make IRA contributions on your behalf. If you and your spouse are both older than 50, you can each contribute up to $6,000 to an IRA in 2010 (although the total contributions cannot be more than your spouse’s earned income). You both can contribute to a Roth as long as the adjusted gross income on your joint return is less than $177,000 in 2010 (the maximum contribution starts to phase out if you earn more than $167,000).
My son is 17 and worked over the summer in a sunglasses shop. Can he open a Roth IRA?
As long as he had some earned income in 2009, he can open a Roth IRA and contribute up to the amount he earned for the year or $5,000 (whichever is less). If he doesn't want to use his own earnings for the Roth, you are allowed to give him the money to contribute to the account. He has until April 15, 2010, to contribute to an IRA for 2009.
The long-term benefits can be huge. If your son contributes $1,000 to a Roth IRA now and his investments return 8% per year, that $1,000 could grow to about $47,000 by the time he's 67 -- not counting any other money he adds through the years! He'll be able to withdraw the contributions at any time without taxes or penalties and can withdraw the earnings tax-free after age 59 1/2. See Why Your Kids Need a Roth IRA for more information.
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Reader Comments (38)
Posted by: nonnie sherrod at 01/07/2010 01:25:49 PM
I want to convert 428k from my regular IRA into a new Roth IRA, I already have an existing Roth with 53k. what amount of taxes do I expect to pay, I am currently in the 28% bracket, do I have to wait 5 years before I can draw from this account which is my primary account for retirement, I am 70 years old. thanks Nonnie Sherrod
Posted by: walter ellis at 01/07/2010 08:37:39 PM
hi Kim, tons of info on the Roth but no info on best way to take distributions. Let` say you want to withdraw 100k from your accounts and you have met all requirements to make this happen except advising your bank via some type of form. Also, how does Unc. Sam play a part in this event, 1099 sent by bank to IRS, A line item on 1040 as income non-taxable? Do any agencies that require " means testing " consider distributions in this area as income? My accounts are with BofA online and self directed and it`s difficult to produce the paperwork that puts a distribution in process and the branch want` nothing to do with this as they are not considered as part of the investment group. Pls. respond, TIA
Posted by: barbara at 01/07/2010 09:43:58 PM
we bought our home in may of 2008. are we quaified for homebuyers tax credit
Posted by: don taylor at 01/08/2010 10:01:28 AM
Hi Kim...I sent a question in about EPS and PE. How do I retreive my answer or do you forward to my E mail?
Posted by: KEN FARRELL at 01/08/2010 06:08:24 PM
HI KIM, YOU ARTICLE IS QUITE CLEAR, I AGREE WITH YOU. . BUT MY BROKER SAYS "ONLY THE MONEY OVER YOUR REQUIRED DIST. CAN BE CONVERTED. I. E. IF I WANT TO CONVERT 100,000 U WOULD HAVE TO WITHDRAW 200,000 AND PAYTAX ON THE 200,000." WhAT SAY U? CPAs HEDGE.
Posted by: Art at 01/08/2010 08:19:24 PM
I think you got your math wrong on the $1,000 Roth contribution for a 17 year old. It will grow to $47,000 by the time he is 67, not $4,700!
Posted by: Kathy at 01/09/2010 03:17:04 PM
My daughter just turned 18, 12/23/09. I generally claim her as a dependant each year. However, this year she inherited some $ (five figure) at the age of 18 which she then placed some in a CD, some in I Bonds, Savings, & her own checking account. She also worked during the Summer Season only for minimum wages (2009). Can I still claim her on my tax return or does she have to file her own taxes for 2009?
Posted by: Bob at 01/09/2010 04:43:15 PM
Kim, what is the rule for withdrawing from a Roth that has been funded by a conversion from a regular IRA at age 73? Can the money from the IRA go into a Roth and then withdrawn at will? Also, can I make a contribution to the Roth at age 73 from income earned in 2010? Thanks.
Posted by: Richard Ring at 01/10/2010 09:00:59 AM
My question concerns the five year requirement before withdrawl. I am retired, well over the 59 1/2 minimum age limit, and have been each year, transferring from an IRA to a Roth, paying the due taxes. Is the portion from 6 or more years previous transfer available to me, or do I have to wait until 5 years after my last transfer?
Posted by: Kim Lankford at 01/10/2010 09:03:15 AM
Art, hi, this is Kim Lankford. Thanks for your careful reading! My math was correct but I made a very unfortunate typo -- it should have been $47,000 not $4,700. The child's $1,000 contribution can grow to $47,000 over 50 years if the investments return 8% per year -- which really illustrates how valuable it can be to start saving early for the future. Thanks for the heads-up, we'll fix it in the story.
Posted by: Kim Lankford at 01/10/2010 09:11:55 AM
Ken, this is Kim Lankford. Your CPA is right. If you're over age 70 1/2, you can't convert to a Roth just to get out of taking your required minimum distribution for the year. Instead, you still need to take that year's RMD, but then you can make the conversion. But that will be the last RMD you'll need to take -- RMDs are not required from Roth IRAs, so you won't need to take any more required minimum distributions starting the year after you make the conversion. Hope this helps.
Posted by: Kim Lankford at 01/10/2010 10:20:22 AM
This is Kim Lankford with more information for Barbara, who asked about the 2008 first-time home buyer's credit. There was a tax credit for first-time home buyers in part of 2008, but it wasn't nearly as generous as the credit for people who bought their first homes on January 1, 2009, or later. People who bought their first homes after April 8, 2008, to December 31, 2008, could claim a tax credit equal to 10% of the purchase price, up to $7,500. But this tax credit was actually a tax-free loan that must be paid back to the government over 15 years, starting two years after the year the credit was claimed. If you sell the home before you finish paying back the loan, the balance is due in full in the year of the sale. That credit was only available to single filers with modified adjusted gross incomes of $95,000 or less, or married couples filing jointly with incomes of less than $170,000. And you're considered a first-time home buyer if you (and your spouse, if you are married) did not own a home during the previous three years. The credit became much more generous for people who bought their first homes on Jaunary 1, 2009, or later -- they can get a credit of up to $8,000 that never has to be repaid. For more information about the tax breaks for people who bought their first homes on January 1, 2009, or later (and the expansion of the credit after November 7, 2009), see Kevin McCormally's, "FAQs on the New Home Buyer Tax Credits." Hope this helps.
Posted by: Kim Lankford at 01/10/2010 10:33:30 AM
Bob, this is Kim Lankford with more information about the tax rules for withdrawing money from a Roth conversion made after age 59 1/2. These rules are tricky. As soon as you convert the traditional IRA to a Roth, you can withdraw any part of the amount that was moved from a traditional IRA with no additional tax or penalty (because you pay tax on the converted amount when you make the switch). If you withdraw any earnings from the Roth account before you meet the five-year test, however, that amount will be taxed. (There would be no penalty, though, becuase you're older than 59 1/2.) You'll pass the five-year test for a 2010 conversion on January 1, 2015 -- the beginning of the fifth calendar year after the year of the conversion. The IRS considers the first money out of a Roth IRA to be a return of contributions (tax- and penalty-free); next comes a return of converted amounts (always tax-free and penalty-free if you're at least 59 1/2 or the account passes the five-year test); after all such funds have been withdrawn, then any money that comes out is considered earnings, which are taxed if you aren't at least 59 1/2 and you haven't met the five-year test.
Posted by: Arthur at 01/10/2010 08:34:48 PM
Kim: I have $600,000 in stock and $600,000 in cash in my IRA. I had opened a Roth IRA conversion account three years ago and contributed cash to it with the excess over my minimum required distribution for those years. (I'm 73 yrs old). Can I contribute the $600,000 in stock to my Roth or do I have to sell the stock and convert the cash to the Roth? Whatever tax I will have to pay will come out of my cash in my regular investment account, therefore leaving all of the converted funds intact in the Roth.
Posted by: Stephanie Broglie at 01/17/2010 06:25:47 PM
Kim - how do "Rollover" IRAs affect the total balance of IRA accounts when making a conversion (if they affect it at all)? My husband made too much money in 2009 for us to contribute to a Roth, so we would like to use the "backdoor" method and pay into a non-deductible IRA for 2009 now and convert it. I'm just wondering if the amounts in our rollover IRAs are going to prevent us from doing this (for tax purposes). My husband and I do NOT have any traditional IRA accounts or non-deductible IRA accounts, but we do have two "rollover" IRA accounts that were old 401K accounts that we "rolled over" when we left our previous employers ($250,000 worth).
Posted by: Arthur at 01/18/2010 09:03:53 AM
Kim: On 01/10/2010 I asked if I could fund my Roth conversion with stock I have in my Traditional IRA or do I have to sell the stock in my IRA and transfer the cash to my Roth. Since I plan to do this in the next several days could you please let me know if the Internal Revenue Service allows this manuver, i.e. transfer stock from the IRA to the Roth? I ask you because getting through to the IRS is almost impossible at this time of the year. Thank you.
Posted by: Steve O. at 01/19/2010 10:45:20 AM
Kim - In 2010, I've already converted my Traditional IRA to a Roth IRA. I did not claim a tax deduction for the original Traditional IRA contributions several years ago. When I converted the entire Traditional IRA to a Roth IRA, the value of funds converted was less than the total amount of the original Traditional IRA contributions (a "loss" due to market conditions). Would I be able to use this "loss" as an offset against capital gains from a stock or mutual fund sale in 2010 (before the capital gains tax rates sunset at the end of the year)? Thank you!
Posted by: Ruth at 01/19/2010 03:00:46 PM
I'm 73, single with earned income this yr of $8,000. Can I contribute to existing IRA or do I have to open a Roth? What are the distribution rules on the new Roth?
Posted by: Kim Lankford at 01/20/2010 04:34:42 AM
Stephanie, this is Kim Lankford with answers to your questions about rollover IRAs. Money you rolled over from a 401(k) to an IRA is considered to be either a traditional IRA or a Roth, depending on whether you paid taxes when you made the rollover. If you simply moved the 401(k) money to an IRA without paying taxes on it, then it is now considered to be a traditional IRA. If all of your 401(k) contributions had been pre-tax, then you'll have a big tax bill when you convert to a Roth IRA -- even if you contribute to a nondeductible IRA now. The amount taxable on the conversion is based on the ratio of nondeductible contributions to the total balance in all of your traditional IRA accounts. So if the nondeductible IRA contributions represent 5% of your total balances in your traditional IRAs, then only 5% of any amount rolled over would be tax-free.
Posted by: Kim Lankford at 01/20/2010 05:03:47 AM
Ruth, this is Kim Lankford with answers to your Roth contribution questions. You can't contribute to a traditional IRA after age 70 1/2, but there's no maximum age limit to contribute to a Roth. You must have some earned income for the year to qualify, and as long as your modified adjusted gross income is under $105,000 (for single filers), you can contribute up to $6,000 to a Roth IRA for the year, which includes the standard $5,000 limit plus a $1,000 catch-up contribution since you're 50 or older. You can't contribute more than the amount of your earned income for the year. The benefits of a Roth IRA are the same as they've always been -- you don't get a tax deduction for your contributions, but the money can grow tax-free for the future. You can withdraw your contributions tax-free and penalty-free at any time, and you can withdraw the earnings tax-free after you reach age 59 1/2 and have had a Roth IRA for at least five years (the five-year holding period can actually be a bit shorter than five years). You aren't required to take required minimum distributions at any age and your heirs can inherit a Roth tax-free.
Posted by: SMLBob at 01/21/2010 10:07:12 AM
Is there any advantage to opening more than one Roth IRA account ? Does the possible need to recharacterize some of the conversions from my traditional IRA enter into this decision ?
Posted by: Kim Lankford at 01/21/2010 02:25:17 PM
Arthur, this is Kim Lankford with information about whether you need to sell the stock when you convert the traditional IRA to a Roth. I talked with Rande Spiegelman, vice president of financial planning at Charles Schwab, who said that you should be able to do an in-kind transfer of securities when converting to a Roth IRA and it shouldn't matter whether you're converting with the same provider or with another provider. He says since there is no tax advantage or disadvantage either way (you don't have to pay taxes on the sale as long as the money remains in an IRA), the only two reasons to transfer securities instead of selling first and transferring cash would be to avoid commissions on the round-trip sale and repurchase or to avoid being out of the market for the time it takes to convert to the new account. Otherwise (especially in the case of no-load, no-fee mutual funds), he says, you could just sell first, transfer the cash, and then reinvest accordingly. It's best to talk with your IRA administrator to find out the specific procedures you'd need to follow to convert the account. I hope this helps.
Posted by: PAUL at 01/21/2010 10:54:19 PM
IF I MOVE A ROTH FROM ONE ESTABLISHMENT TO ANOTHER,WHAT IS THE TIME FRAME ALLOWED BETWEEN WITHDRAWL FROM ONE ESTABLISHMENT TO THE DEPOSIT INTO THE OTHER ESTABLISHMENT
Posted by: phyllis at 02/01/2010 09:15:35 PM
Kim, I'll be retiring soon. I have 30K in my 401K at work, still contributing 5% each week. Would it be a good move to put it now into a Roth IRA? If so what stepts do I take to move it out from Fidelity 410k? I plan on rolling it all over. Do I start at work, call Fidleity 410k or open a Roth 401K first? I know nothing about switching or forms you have to fill out! I'm over 65, the only 401k we have from my employment. My husband is retired. Do you have anything you mail out on easy steps you need to do on changing over to a Roth 401k? thanks, Phyllis
Posted by: Robert L. at 02/07/2010 10:21:20 PM
Hi Kim, I'm 80, and have a traditional IRA which I've been taking out the taxable RMD each year. If I convert the entire account to a Roth in 2010 do I still have to first take out the RMD based upon my balance at the end of 2009 before Dec. 31, 2010? and then include 1/2 the balance in my 2010 return and 1/2 in my 2011 return? Or can I convert the entire amount in my account without the "end of 2009" RMD? In the latter situation my Roth account would be higher which is advantageous. Does it make a difference if the conversion is done prior to April 15, 2010?
Posted by: Paul S. at 02/13/2010 11:38:37 AM
I am trying to find a ROTH contribution calculator that will tell me how much I can contribute. I am over the income limit for the full amount, but not over the maximum. How do I find out the amount I can contribute? I am over 60 and my AGI for last year was only 5,000 over the cut-off for the maximum contribution.
Posted by: phyllis a at 02/14/2010 09:55:27 AM
Kim, I'll be retiring in about a year. I have about 30K in my untaxed 401K at work, still contributing 5% each week. I would like to move to a Roth IRA. Would it be better to move half before April 15, 2010 and pay taxes on half then anytime after April 15th pull the rest half in 2011? What steps do I take to move our money to an Roth IRA? I know nothing about switching to a Mutual Fund, Bonds or CD. I'm over 65, the only 401K we have, my husband is retired. thanks phyllis a
Posted by: Sharon at 02/21/2010 02:22:12 PM
My husband and I plan to open a Roth IRA by April 15, 2010 and make contributions totaling our allowed $6000.00 based on our income. I am of the understanding that this can be claimed on our 2009 tax return as a deductible amount against our gross income. Am I correct or do we have to have a pre-existing IRA?
Posted by: Rose at 02/24/2010 12:58:00 PM
Working on taxes... Joint return with earned income of 22,000 (husband) and 2,300 (wife)-both going into retirement. At the first of the year we both contributed to a ROTH Ira (6000 each). (Tax preparation software) recognizes the 6000 for Ken but will only recognize 2300 for Rose (up to individual earned income). I thought that with a joint tax filing with both could contribute the maximum to a ROTH Ira based on total earned income. Help - I want to finish my taxes.
Posted by: Pam at 02/26/2010 12:20:48 PM
I have a Roth opened in 1998 or before, the original amount was about 15000. In 2000 I took out 10000. for a first time home purchase. Today the balance is only 4200. due to gains and losses over time but less than the original 5000 that should be left. Will I pay any tax if I get a distribution? I am not 59 1/2.
Posted by: potter at 03/02/2010 03:41:02 PM
i just sold a stock in my roth ira. do i pay taxes on the gain or is it tax free??
Posted by: Chuck Daniel at 03/20/2010 08:56:22 AM
I have what I understand is a very common mistake on my Roth account yet cannot find any concrete answers. My 2008 contribution was incorrectly documented as a 2009 contribution by the trustee. I now have no 2008 contribution listed and already have one for the 2009 tax year. The deposit was made as an electronic transfer in March 09 prior to the April 15th 2008 contribution deadline. Is there any legal reason the trustee wouldn't be able to correct it as long as the contribution met the filing deadline? I've looked but cannot find any references myself in the IRS publications to this situation. (pub 590, etc...)
Posted by: JD at 03/31/2010 11:55:12 AM
To Sharon at 02/21/2010 02:22:12 PM - contributions to a Roth IRA are not deductible on your tax return.
Posted by: JD at 03/31/2010 12:02:40 PM
To Paul S. at 02/13/2010 11:38:37 AM - go to IRS publication 590, starting approx page 58. Here is the link: irs.gov/pub/irs-pdf/p590.pdf
Posted by: JD at 03/31/2010 12:05:47 PM
I would like to open a Roth IRA for 2010. I already contributed (nondeductible) to a traditional IRA for 2009. I may be subject to the reduced contribution limits based on our AGI. How should I calculate how much I should contribute for 2010? If I contribute too much am I able to withdraw the excess contribution by 4/15/2011, when my 2010 tax return is due?
Posted by: Julie S at 03/31/2010 05:51:23 PM
If I have set up a SEP IRA for 2009 tax year, can I also contribute to traditional IRA? I do not have a 401K.
Posted by: Lisa at 04/10/2010 11:13:25 PM
Hi Kim, I converted an IRA securities account to a Roth account in December 2008 close to the end of the month but my banker assured me it would be a 2008 transaction. This worked for my husband and I due to the income requirements of converting the account to a ROTH. I did not receive a 2008 1099 for this transaction and spoke to my banker who assured me the transaction was officially a 2008 transaction, looked at the recorded date via computer and assured me all was fine. Now I have a 1099 dated 2009 which shows the conversion with a zero tax value so i would think the IRS is looking for a full tax payment and our income is too high to qualify for the transaction in 2009, What can I tell my banker to help him understand? Shouldn't I have received this 1099 in 2009 effectrive 2008? If I recharacterize the conversion, i think it has to be done before April 15th and i also loose the favorable value of the stock(depressed but favorable when assigning a tax) on my stocks which have now rebounded since the dec, 2008 valuation date. Thank you.
Posted by: donald bernard at 07/15/2010 11:39:19 AM
My son asked me if he could use his Roth as a savings acct? He knows he could get a nice tax free dividend, which he could withdraw after 59.5 yrs and he should be able to withdraw any portion of his contributions at any time, correct? Obviously withdrawing contributions will reduce earning potential and defeat the long term growth for retirement. But wouldn't it be a nice tax free savings account?