Ask MAX: Can I convert my regular IRA to a Roth IRA?

March 3, 2005

Dear MAX,

Can I convert my regular IRA to a Roth IRA, and should I?

Santa Fe, NM

Dear Holly,

First, let's tackle the "can you" part of your question, then we'll move on to the "should you".

Can You? The answer to this question is relatively simple to determine. You can convert from a regular to a Roth IRA if your adjusted growth income is below $100,000. That figure applies to both single filers, married couples filing jointly, and heads of household.

If you're married and you're filing separately, you're out of luck. Rules concerning conversions specifically forbid married persons filing separately from converting their IRAs.

That's about all there is to the "can you" part. But now things get a bit more complicated.

Should you? Let's get the bad news out of the way first: If you convert from a regular to a Roth, you could be liable for a big tax hit on your IRA money. Convertees are responsible for paying taxes on any and all money they contributed to their regular IRA that they deducted from their taxable income. That means that all that income tax you didn't have to pay when you made the original contribution is suddenly due to Uncle Sam, in one big, ugly chunk.

The amount you pay in taxes is determined by your current tax bracket. If you have $100,000 in your account, you may wind up with an immediate tax bill of $25,000, if you are in the 25% tax bracket. If you are in the 33% tax bracket, you would owe $33,000.

The thought of writing a check that big to the IRS is enough to stop many a potential regular-to-Roth converter dead in their tracks. But despite the potentially horse-choking tax bill, a conversion from a regular to a Roth IRA is a good way to go for certain people.

If you're a younger investor (we couldn't help but notice that you coyly declined to reveal your name in your question), a Roth conversion is probably a good idea. That's because you have plenty of time before retirement to make up the money you lost to taxes during the conversion.

Certain older investors can benefit from a conversion as well. Roth IRA contributions are taxed (or rather made with after-tax dollars); distributions are not taxed. Regular IRA contributions are not taxed; distributions are. If you are fairly sure you'll be in the same (or higher) tax bracket when you become eligible for distributions, and you don't plan on taking large distributions for at least five years, a Roth IRA conversion could end up saving you a bundle in taxes over regular IRA distributions.

(If you'll be retiring or you're planning to begin taking distributions from your regular IRA in less than five years, converting to a Roth is not an option. Convertees who begin taking distributions within the five-year window will have to pay a 10% penalty on the distributed money.)

Another point to consider is whether or not you will depend on your IRA for income when you retire. In a traditional IRA, you must begin taking distributions at age 70 ½. If your retirement plan isn't counting on those distributions to sustain you in your golden years, then a conversion to a Roth may be a good idea. Because you aren't forced to touch the money you have in your Roth IRA account, it can continue to grow and grow. That means you could throw yourself a hell of a party when you reach your 100th birthday, or you could pass your Roth onto your kids, tax free.

Still can't decide if converting is the right move for you? The good people at H&R Block have a great little conversion calculator that can make the choice a little easier. Click here to give it a try.

Thanks for the question.


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