Dispelling Common Misperceptions on Roths and Conversions

Roth savings accounts and Roth conversions are two areas where clients commonly encounter questions. To contribute to an IRA (including a Roth IRA), the client must have earned income for the year, but must also have income that does not exceed annual income thresholds. These restrictions don't apply with respect to Roth conversions. Taxpayers can execute Roth conversions even if they have no earned income for the year--and even if their income exceeds the relevant thresholds (the conversions are, of course, taxable). It's also important to understand the ordering rules when it comes to taking distributions from Roth accounts. Roth IRA distributions are subject to ordering rules, so that distributions are first treated as coming from direct contributions, and next from converted dollars (earnings are treated as being distributed last). This rule applies regardless of how many Roth IRAs the owner has. Roth 401(k)s are not subject to this ordering rule. Roth 401(k) distributions are treated as a pro-rata mix of direct contributions, converted dollars and earnings. For more information on the rules governing Roth conversions, visit Tax Facts Online. Read More: Link to Q3713.03.