3662 / Can an individual roll over or convert a traditional IRA or other eligible retirement plan into a Roth IRA?

Yes. A “qualified rollover contribution” can be made from a traditional IRA or any eligible retirement plan ( Q 3996) to a Roth IRA.¹

Amounts that are held in a SEP or a SIMPLE IRA that have been held in the account for two or more years also may be converted to a Roth IRA.²

The taxpayer must include in income the amount of the distribution from the traditional IRA or other eligible retirement plan that would be includable if the distribution were not rolled over.³ (See Q 3671 for taxation of amounts distributed from such IRAs.) Thus, if only deductible contributions were made to an eligible retirement plan, the entire amount of the distribution would be includable in income in the year rolled over or converted. While the 10 percent early distribution penalty ( Q 3677) does not apply at the time of the conversion to a Roth IRA, it does apply to any converted amounts distributed during the five-year period beginning with the year of the conversion.⁴

When an individual retirement annuity is converted to a Roth IRA, or when an individual retirement account that holds an annuity contract as an asset is converted to a Roth IRA, the amount that is deemed distributed is the fair market value of the annuity contract on the date of the (deemed) distribution. If, in converting to a Roth IRA, an IRA annuity contract is completely surrendered for its cash value, regulations provide that the cash received will be the conversion amount.⁵

Non-rollover contributions made to a traditional IRA for a taxable year (and any earnings allocable thereto) may be transferred to a Roth IRA on or before the due date (excluding extensions of time) for filing the federal income tax return of the contributing individual and no such amount will be includable in income, provided no deduction was allowed with respect to such contributions.⁶ Such contributions would be subject to the maximum annual contribution limits ( Q 3659).

A “qualified rollover contribution” is any rollover contribution to a Roth IRA from a traditional IRA or other eligible retirement plan that meets the requirements of IRC Section 408(d)(3) ( Q 4004). A rollover or conversion of a traditional IRA to a Roth IRA does not count in applying the one IRA-to-IRA rollover in any 12-month period limit ( Q 4004).⁷

For years prior to 2010, the taxpayer’s AGI was calculated without regard to the exclusions for foreign earned income, qualified adoption expenses paid by the employer, and interest on qualified United States savings bonds used to pay higher education expenses. Deductible contributions to a traditional IRA also were not taken into account in determining AGI. Amounts included in gross income as a result of a rollover or conversion from a traditional IRA or other eligible retirement plan to a Roth IRA were not taken into account.⁸ Social Security benefits includable in gross income under IRC Section 86 and losses or gains on passive investments under IRC Section 469 were taken into account. The definition of AGI excludes minimum required distributions to IRA owners, solely for purposes of determining eligibility to convert a regular IRA to a Roth IRA.⁹

An eligible retirement plan, for this purpose, includes a qualified retirement plan, a IRC Section 403(b) tax sheltered annuity, or an eligible IRC Section 457 governmental plan. Taxpayers, including plan beneficiaries, can directly transfer (and thereby convert) money from these plans into a Roth IRA without the need for a conduit traditional IRA (as was required prior to 2008).¹⁰ (Other than by direct conversion from an eligible non-IRA retirement plan, a beneficiary may not convert to a Roth IRA.)¹¹

Qualified rollover contributions do not count toward the annual maximum contribution limit applicable to Roth IRAs ( Q 3659).¹²

A rollover from a Roth IRA or a designated Roth account to a Roth IRA is not subject to the adjusted gross income limitation and is not subject to tax.¹³

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Planning Point: Major reasons for converting to a Roth IRA often include obtaining tax-free qualified distributions from the Roth IRA and greater stretch from the Roth IRA because distributions from a Roth IRA are not required until after the death of the owner (or the death of the IRA owner’s spouse if the spouse is the sole designated beneficiary and elects to treat the IRA as the spouse’s own), rather than starting at age 73. A conversion also may make sense if it is expected that tax rates will increase (from the time of conversion to the time of distribution), but not if tax rates will decrease. Consider whether any special tax benefits, such as net unrealized appreciation, would be lost if a qualified plan is converted to a Roth IRA. Also, a qualified plan may offer better asset protection than a Roth IRA. State laws vary on this issue. If a taxpayer cannot qualify under the Roth AGI limitations, perhaps he or she can establish a traditional IRA, and then convert that into a Roth IRA. While this has not yet been addressed by the IRS, the strategy was blessed by Congress in its commentary to the 2017 tax reform legislation.

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