How not to screw up your Roth IRA conversion

Q. It has been my understanding that if converting from a traditional IRA to a Roth IRA, it was an all or nothing event. In 2017, I had no earned income and the same will happen in 2018. I never see any articles on partial conversions such as $100,000 converted from a $1 million account. Can someone do this or any amount and then another random amount the following year and possibly never again?

Many thanks,

Frank

A. Frank, It is great that you are thinking about this while your income is low. That’s exactly when converting makes the most sense.

Conversions are not all or nothing. You can convert any portion of a traditional IRA to a Roth IRA at any time.

That column spawned several more questions to which I can give quick answers about Roth conversions.

•Do I have to wait one full year to convert again? Does the one-year rule apply for Roth conversion? There are no waiting periods for additional conversions. You can convert any portion of a traditional IRA to a Roth IRA at any time.

You are probably thinking of the once a year rollover rule. That rule applies to rollovers of traditional IRA money when the check is cut to the taxpayer and the taxpayer deposits the amount into another traditional IRA within 60 days.

•Is it wise to open a separate Roth IRA account for each conversion, or one Roth account for all conversions is OK? Starting in 2018, one account is fine.

It used to be a good idea to put the amounts for each conversion in its own account because the accounting and tracking was easier in the event you wanted to reverse a conversion. A “recharacterization” of a conversion could be performed as late as the filing deadline for extensions in October of the year after the year a conversion was executed. However, the new tax law prohibits recharacterizing (reversing) a conversion performed in 2018 or later. Now, once you convert, you can’t undo it.

•Can you convert to a Roth in the same year you make a contribution or take a distribution from a Roth IRA? Yes, you can. Each action is accounted for in separate sections of Form 8606.

•Do conversions from an inherited IRA work the same way? You cannot convert an inherited IRA to a Roth IRA.

•With recharacterization gone, what do I do if I made a Roth contribution but later find my income is too high to make a Roth contribution? Recharacterizations are only prohibited for conversions, not contributions.

One option is to recharacterize the Roth contribution as a traditional IRA contribution. If you are a participant in a qualified retirement plan, this would be a nondeductible IRA contribution tracked on Form 8606. If you don’t want deal with the 8606, another choice is to remove the funds as an excess contribution. Any gains on the contribution would be taxable as ordinary income plus a 10% penalty if you are under 59 ½ but you cant take a loss if there is one.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.