Roth IRA Conversion Limit Removal

by Herb Kirchhoff

The Internal Revenue Service in 2010 removed the income and filing status limits that had kept a number of taxpayers from converting their traditional tax-deferred individual retirement arrangements to tax-free Roth IRAs. The Tax Increase Prevention and Reconciliation Act of 2005 mandated the removal of these limits in 2010.

Former Limits

Prior to 2010, you were prohibited from converting a traditional IRA to a Roth IRA if you had earnings over $100,000 or if you were married filing separately. As of Jan. 1, 2010, both of these restrictions were abolished. After that date, you could make IRA conversions regardless of your income or filing status. This change allowed high-income taxpayers and married couples who file separately to take advantage of IRA conversions.

No Money Limit

There is no statutory limit on the amount of an IRA conversion. The only limit is your ability to pay the income taxes on the amount being converted. Because Roth IRAs are funded with after-tax contributions, the amount you are converting from your traditional tax-deferred IRA is taxed the same as a distribution and will be added to your taxable income. If you reinvest your proceeds in a Roth IRA within 60 days, you won’t owe the 10-percent early withdrawal tax penalty. You can keep part of your proceeds for personal purposes but you will have to pay the 10-percent penalty on top of the income taxes you owe on the money you keep.

Conversion Rules

If you have started taking annuity-style periodic equal payments from your traditional IRA, you can still convert to a Roth IRA providing you continue the periodic equal payments. You will owe income tax on the conversion amount but not the penalty tax. If you are age 70-1/2, you can’t convert the amount that represents your required minimum distribution for the year. The special rule for 2010 conversions that allowed you to spread the tax bite over two years won’t apply for conversions done in 2011 and later years.

Account Ceiling

Repeal of the income and filing status limits on IRA conversions did not affect the income ceilings for opening a Roth IRA. Individuals can’t open a Roth IRA if they have incomes above $122,000 as of publication. The ceiling for married couples filing jointly is $179,000. The repeal also didn’t affect the five-year holding period before you can make tax-free retirement withdrawals. Each conversion has a separate five-year holding period. The repeal also didn’t affect your right to reverse an IRA conversion if you act by Oct. 15 of the year following the year in which you did a conversion.

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