How Much Time Is Needed to Convert an IRA to a Roth IRA?

by Wilhelm Schnotz

In 2010, the Internal Revenue Service’s one-time conversion rule allowed investors to convert a traditional IRA to a Roth IRA and spread taxes over a three-year period, triggering a rush of conversions as retirement planners took advantage of the exception to normal tax laws. While those allowances are a thing of the past, many people opt to convert their IRA to a Roth and pay income taxes on the funds now, rather than at retirement. While the IRS governs conversions with many regulations, it’s a relatively quick process for investors.

Internal and Trustee-to-Trustee Conversions

If you select a Roth IRA and open an account with a new investment firm, or merely select a Roth product with your current brokerage, converting a traditional IRA to a Roth IRA is only a matter of processing time between your banking institutions. In an internal conversion, your brokerage simply characterizes the investment as a Roth, and reports the conversion to the IRS. Similarly, transferring funds between brokerages is a matter of paperwork and electronic transfers. Both should be complete in a few days if the process runs smoothly.

Distribution as Conversion

A timetable is more important for investors who manually convert a traditional IRA to a Roth by cashing out of the IRA and reinvesting in a Roth. If you choose to convert your account in this method -- some brokerages won’t handle trustee to trustee transfers -- you must reinvest all retirement funds into your Roth within a 60-day window after you receive the distribution. If you hold funds for longer, the IRS treats the transfer as if you received a premature distribution, and assesses a 10 percent penalty against the amount transferred.

Converting SIMPLE IRAs

If you work for a small employer that provides a Savings Incentive Match Plan for Employees, or SIMPLE IRA plan, you may not be able to immediately convert it to a Roth IRA. The IRS requires that funds placed in a SIMPLE IRA must remain there for at least two years after you began the account before it’s eligible to be converted.

Taxes on Conversions

Even if you avoid penalties when you convert your IRA to a Roth, you should be prepared to pay income taxes on the entire amount you transfer between the two types of plans. Because you deferred taxes when you made pretax contributions to your IRA, when you move assets into a Roth IRA, you’re liable for income taxes on the amount transferred in the year you make the conversion. Because rollovers of a large IRA may push you into a high tax bracket, you may perform a partial rollover, and convert funds in smaller amounts each year. If you perform a partial conversion, and you hold more than one IRA, you must draw the rollover funds equally from each IRA you maintain.