John M. Hoffman & Associates CPAs
Frequently Asked Tax Questions
Individual Retirement Accounts – IRAs
"What is this thing about ROTH conversions?"
A ROTH conversion is where you take a non-ROTH IRA, liquidate some or all of it, and have the proceeds deposited into a ROTH IRA. The conversion is essentially a taxable event, but is not subject to penalties for early withdrawal. Any basis in your IRAs at the time of the conversions is ratably recouped on a tax free basis. Let’s say that you have a $10,000 value in an IRA and you have basis of $2,000 from a non-deductible contribution. If you convert the entire $10,000, only $8,000 is taxable as $2,000 of the conversion is from IRA basis. If you converted $6,000 of the amount, $4,800 (80% in this example) would be taxable and the other $1,200 would be return of basis.
Currently (until 2009) there are limits on how much income you can have and still be eligible to do a ROTH conversion. That limit is $100,000 of income both for single and married filing separate taxpayers. ROTH conversions are not allowed for taxpayers electing married filing separate status. After 2009 there is (under current law) no income limit for ROTH conversions.
