Roth IRA Conversion Tax Rules

roth ira taxes

Roth IRA Conversion Tax Rules
Converting your IRA does not have to be a frightening experience. There are a few IRA rules for conversion you must follow to avoid paying fees or penalties. Owning a traditional IRA and converting it into a Roth IRA is a common practice. The tax rules are easy to understand to convert your traditional IRA account without problems. There are many benefits of a Roth IRA that will be available to you to help grow your investments tax-free and begin making qualified distributions.

1. Multiple Types of IRA Accounts Can Be Converted
Before learning the simple IRA tax conversion rules, it is important to know that multiple types of IRA accounts can be converted or rolled over into a Roth IRA. These include 401(k), 403(b), 457(b) deferred compensation plans, SIMPLE IRA, annuity plans and spouse-inherited IRA plans that are available for Roth IRA conversion.

2. Eligibility to Convert to Roth IRA
No conversion or rollover into a Roth IRA must meet income eligibility requirements. Before the year 2010, the eligibility requirements stated that if you earned more than $100,000 you could not make a conversion to a Roth IRA. Congress repealed this requirement with the Tax Increase Prevention and Reconciliation Act. A retirement account holder can now earn any amount of income and still rollover to a Roth IRA.

3. You Must Pay Taxes On Conversion Amounts
A Roth IRA gives you tax-free growth during the time period of ownership. Upon conversion from a traditional IRA to a Roth IRA, taxes must be paid on the total amount converted. The funds available in your IRA could benefit from this taxed conversion if you believe that your future tax rate will be lower. The rate of tax charged on your conversion is equal to your current tax rate and must be filed on IRS Form 8606 with your annual taxes.

Conversion Example:
• 25 Percent Tax on $50,000 Income is $12,500
• 15 Percent Tax on $50,000 Income is $7,500

Only the portion of your income that exceeds into a higher tax bracket will be taxed at the higher rate. This can save you some money, but the changes between different tax rates can quickly increase or decrease your IRA earnings if you are not careful upon your conversion.

4. Partial Conversions of an IRA to Roth IRA are Acceptable
After considering your tax obligations, you may find that rolling over your entire amount could be expensive to do at one time. The IRS allows you to make partial conversions to help offset the tax amount that you could owe. It is possible that you could convert portions of your traditional IRA account into your Roth IRA account. This method helps you to reduce your tax burden if your retirement funds will be seriously affected by high taxes upon conversion.

5. Non-Taxable Distributions With a Roth IRA
Your traditional IRA requires you to begin taking required minimum distributions or RMDs at age 70½. Each distribution percentage is determined by your age. Unlike a traditional IRA, a Roth IRA does not have a required minimum distribution, but it does have tax rules that must be followed. Not following these rules will create tax penalties of 10 percent plus standard tax rates during distributions.

The Roth IRA non-taxable distributions include:
• Account is Five Years Old
• Your Age is 59½
• Distribution for Disability
• Distribution for Death
• Higher Education
• Medical Expenses More Than 7.5 Percent of Your AGI
• First-Time Home Purchase
• Your Original Distributions or Rollover Amounts in Holding
• Distributions of Contributions Before Tax Filing Date

Roth IRA Conversion Benefits
There are many benefits to converting your IRA to a Roth IRA. The biggest incentives include no minimum distributions, tax-free growth and the ability to change your custodian for better control over your retirement funds growth. Many IRA holders that rollover into a Roth IRA are realizing that purchasing real estate investments with a self directed Roth IRA is easy. The return on investment is 15 percent or higher and offers a guaranteed monthly income to investors. Managing your money correctly is essential and taking more control over your retirement allows you to earn the returns that you deserve.

JWB Real Estate Capital serves clients in 6 different countries and 19 different states by providing consistent, secure passive income streams through cash-flowing investment properties.  In 2011, JWB Real Estate Capital was recognized as the #3 Fastest Growing Company in Northeast Florida.  Discover how you can earn safe, secured, consistent returns through cash-flowing rental properties by requesting your Free Information Kit & Audio CD's at or calling (904) 677-6777.


Schedule Now

If you’re ready to get started with JWB, schedule a strategy session with our property investing experts now!