Roth IRA Conversions for Married and Filing Separately

by Herb Kirchhoff

In January 2010, income and filing status restrictions on Roth individual retirement account (IRA) conversions were repealed. These curbs kept high-income taxpayers and married couples who filed separately from doing Roth conversions. Since the rule change, any taxpayer can convert a traditional tax-deferred IRA to an after-tax Roth IRA regardless of income. But the repeal did not change the limits on direct Roth IRA contributions that affect married people filing separately.

Conversion Ban

Prior to 2010, the Internal Revenue Service sought to ensure wealthy people wouldn’t use Roth IRA accounts for tax-free income, and prohibited anyone who earned more than $100,000 from opening a Roth IRA or converting a traditional tax-deferred IRA to a Roth account. To prevent married couples from circumventing the income restriction by filing separate tax returns, the IRS also banned Roth IRA accounts and conversions for married couples filing separately. Congress did away with these restrictions starting with the 2010 tax year.

Doing Conversions

You can convert an IRA by filling out and submitting a conversion form from the fiduciary entity that administers your IRA. If you convert to a Roth IRA through a direct same-trustee conversion, or a direct trustee-to-trustee conversion, there won't be any tax withheld from the converted amount. Although there's no tax withheld, you still will owe income tax on the converted amount. Because the conversion money is going into another retirement account, rather than being paid to you, it's not subject to the 10 percent penalty on early withdrawals.

Tax Reporting

Your IRA fiduciary will send you a Form 1099-R showing the amount you converted from the traditional IRA to the Roth IRA. You must add this amount to your taxable income for the year. You report the conversion by filling out Form 8606 and filing it with your tax return. Those who converted in 2010 were allowed to pay the tax on the converted sum over two years. However, those converting in 2011 and beyond must pay the entire tax amount in the same year they convert the IRA.

Contribution Limits

The rule change didn't affect income limits on post-conversion Roth IRA contributions that may adversely affect certain married people who file separately. If you are married filing separately, but lived with your spouse at any time during the year, you can't contribute anything to a Roth account if you earned more than $10,000 a year. But if you lived apart from your spouse for the entire year, your status as married filing separately puts you in the same boat as a single taxpayer. This means that you will be able to contribute $5,000 per year if you earned less then $107,000. A married couple filing jointly can make a $5,000 contribution if they earned less than $169,000.

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