Rollover IRA to Roth IRA Distribution Plan

24 May

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Not only are you permitted to rollover a qualified IRA plan distribution to another plan or to a traditional IRA, but you may also rollover the distribution to a Roth IRA. If you choose this option, however, you are technically converting the rollover IRA assets to a Roth IRA and all of the usual rules for Roth IRA conversions will apply. Specifically, you must be eligible to make the conversion in the first place. If you are, then you must pay income tax on all the pre-tax money that is transferred out of your employer’s plan into your Roth IRA. And you must pay it in the year of the conversion. There is one exception to this rule for conversion that takes place in the year 2010. You are permitted to spread the income from the IRA conversion over two years, beginning in 2011 (half in 2011 half in 2012). For conversions after 2010, however, all of the income from the rollover IRA conversion must be included on the tax return for year of conversion.

Who is Eligible?

For the year 2009, you are eligible to convert rollover IRA to a Roth IRA. If your modified AGI is $100,000 or less, and if you are married, you must file a joint return with spouse. (In other words, those who are married filling separately do not qualify to convert rollover IRA plan assets to a Roth IRA.) Beginning in 2010, everyone qualifies to converting rollover IRA to a Roth IRA.

Which Distributions Are Eligible?

As is the case with rollovers to other plans to traditional IRAs, all distributions and partial distributions from qualified IRA plans and qualified annuities are eligible to be rolled over to a Roth IRA, with the exception of required distributions and annuities or periodic payments that last for ten years or more.

Advantages and Disadvantages

Once you make the decision to roll over your employer’s plan into an IRA, the next question you must ask yourself is traditional IRA or Roth IRA? The decision involves a variety of factors. The beneficiary must first qualify to convert rollover IRA assets to a Roth IRA, the transfer from a qualified plan to a new Roth IRA must occur as a trustee-to-trustee transfer. The disadvantage of converting rollover IRA to a Roth IRA is that you must pay tax on the entire amount of the distribution right away.

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