Understanding the Impact of Roth Conversions on Roth Eligibility

To contribute to a Roth IRA directly, an individual must have compensation (counting earned income, self-employment income, bonuses, commissions, but excluding capital gains, rental income, annuities, dividends, and other similar types of income). To qualify for a direct contribution, the individual also cannot have modified adjusted gross income (MAGI) that exceeds certain threshold levels that are set annually. The IRS Is clear that Roth conversions themselves do not count in determining whether an individual's MAGI exceeds the relevant thresholds. This is counterintuitive for many--because a Roth conversion increases the individual's taxable income and is taxed at ordinary income tax rates. For more information on the rules governing Roth conversions, visit Tax Facts Online. Read More: Link to Q3713.3.