Roth IRA conversions and "qualified" rollovers

A Roth IRA can be funded in one or a combination of several ways up to the eligible maximum contribution amounts. The money can be transferred directly from your bank

account or converted (“rolled over”) from another traditional IRA. This can usually be completed either online or by contacting a Roth IRA provider. Providers include banks and brokerage firms, mutual fund companies, and even insurance companies. There are usually fees associated with funding a Roth IRA. These may be annual account maintenance fees or set up and disbursement charges.

Roth IRA rollovers from your IRA account

Transferring funds from a traditional IRA to Roth IRA allows funds to be transferred without the 10 percent early withdrawal penalty, since you are simply converting the account to a different type of retirement account. If the original IRA was funded with pre-tax dollars, the account will be taxed at the investor’s current tax rate in the year of the conversion. This may be worthwhile if the funds are needed for purchasing a home or certain medical bills that may arise. You will have access to the funds without penalty, even though they are taxed.
 

Qualified conversion deadlines

Conversions or roll-overs from a traditional IRA to a Roth IRA, must be completed by December 31, and can be converted back if necessary if done by April 15. Investors can also take a cash disbursement of the funds, and have 60 days in which to re-invest the money into a Roth IRA. If the re-investment does not occur within that time frame, then the funds are penalized 10 percent and taxes will be due on those funds come the tax deadline for that tax year.

Roth IRA rollover restrictions

 Adjusted gross income requirements still apply to conversions from a traditional IRA to a Roth IRA. One exception is that if an investor is married, but files taxes separate from his or spouse, then that IRA cannot be converted regardless of meeting income eligibility requirements. Also, funds from a company sponsored 401k plan cannot be rolled over into a Roth IRA.

Frequency of conversions not limited

There is no limit to how often funds from a traditional IRA can be converted to a Roth IRA. More than one transfer can be made within a 12 month period.

Partial rollovers allowed

Partial rollovers are also permitted. This leaves some of the funds in one IRA while some are converted to a Roth IRA. A partial conversion could be beneficial if a full conversion would push the investor into a higher tax bracket. Another reason for a partial rollover may include being able to afford the taxes on only part of the funds, since monies are taxed at the time of the transfer.

Regular periodic contributions are easiest

To set up automatic, periodic payments into a Roth IRA from a bank account either the bank or investment firm can provide the investor with the proper paperwork. Here, a pre-determined amount of funds is withdrawn from the account and placed into the Roth IRA fund on a specific day each month, up until the maximum limits are reached. The earlier in the year that the investor can reach the full eligible amount the better to earn more on the investment. This method of funding a Roth IRA is ideal for investors who need to use a budget payment plan over the one lump sum payment option.