The markets are down, and so are tax rates. That makes it an opportune time for some to consider a Roth individual retirement account conversion and a Roth IRA contribution.
But, keep in mind: Roth IRA conversions can no longer be recharacterized, though Roth IRA contributions still can be.
Two Methods of Conversions
Conversions can occur in either of two ways:
- Funds held in a retirement account, such as a traditional IRA or employer-sponsored account, can be directly transferred to a Roth IRA; or
- Retirement funds can be distributed from such an account to the account owner and, within 60 days, be contributed to a Roth IRA.
In either case, taxable income occurs at the time when the funds leave the distributing account.
Required minimum distributions may not be rolled over to a Roth IRA or to any other tax-deferred vehicle.
However, a Roth IRA regular contribution of up to $5,000 may be made in any year, including from the proceeds of an RMD. To make a regular Roth IRA contribution, compensation income (wages, salaries, bonuses, etc.) must be at least the amount of the contribution.
Unlike Roth IRA conversions, regular Roth IRA contributions may be recharacterized as contributions to a traditional (non-Roth) IRA by the extended due date of the individual’s federal income tax return.