For 2009, you may generally convert eligible retirement plan assets to a Roth IRA if your modified adjusted gross income (MAGI) for the year is $100,000 or less (not including the taxable amount of any conversion).  The $100,000 income eligibility limit is the same for both single individuals and married couples who are filing jointly (married couples who file separately are typically ineligible to take advantage of the Roth IRA conversion option in 2009).

Beginning January 1, 2010, the $100,000 income restriction as well as the income tax filing status requirement for conversions will be eliminated.  As a result, virtually all individuals with eligible retirement plan (including Traditional IRA) assets who are willing to pay conversion taxes will be able to convert assets to a Roth IRA.

Assuming you meet the basic eligibility criteria for converting, your Traditional IRA assets, including contributions made to your Traditional IRAs under simplified employee pension (SEP) plans, may be converted to a Roth IRA.  SIMPLE IRA assets may also be converted to a Roth IRA as long as it has been at least two years since you first received a SIMPLE IRA contribution under the employer’s SIMPLE IRA plan. 

In addition, eligible distributions from qualifying employer retirement plans may be converted to your Roth IRA.  Qualifying employer retirement plans include qualified plans (e.g., 401(k) plans or profit sharing plans), governmental 457(b) plans, 403(b) arrangements, and 403(a) arrangements.

No, required minimum distributions (RMDs) may not be converted.  However, once your required minimum distribution is withdrawn, you may generally convert all or a portion of the remaining plan balance provided you meet the basic eligibility criteria for converting. 

Yes.  Basis, including nondeductible Traditional IRA contributions, may be converted to a Roth IRA.  When you convert, tax is not paid on the portion of the conversion that represents the return of basis.  However, it is important to note that is it not possible for you to convert Traditional IRA basis only.  If you convert only a portion of your IRA, the conversion is pro rata representing a portion of the assets subject to taxation and a portion that represents the return of basis.  For purposes of calculating the return of basis, you must treat all of your Traditional and SIMPLE IRAs as one IRA. 

If you have nondeductible basis in any of your IRAs and you elect to conduct a full or partial Roth IRA conversion, you must complete IRS Form 8606, Nondeductible IRAs, to calculate and claim as nontaxable the portion of the Roth IRA conversion that represents nondeductible basis. 

Yes.  You do not have to have earned income to be eligible to convert existing retirement plan savings to a Roth IRA.

Yes.  Converting a Traditional (or SIMPLE) IRA from which you are currently receiving substantially equal periodic payments is not considered a modification of the payment schedule.  Once converted, you must continue the payments from the Roth IRA as scheduled.  If the series of payments does not continue, the series of payments will have been modified and the retroactive penalty will apply. 

If you convert the Traditional IRA with the series of payments in 2010 and elect the special 2-year conversion taxation rule, the taxation will be accelerated by the amount of any distribution in 2010 and 2011. 

For example, if you convert your $50,000 Traditional IRA to a Roth IRA in March 2010 and choose to pay the taxes ratably in 2011 and 2012, $25,000 is includible in income for both 2011 and 2012.  However, if you take a $1,600 distribution of the converted assets from your Roth IRA in 2010, 2011 and 2012 as part of your series of payments, $1,600 will be includible in income for 2010, $26,600 ($25,000 + $1,600) will be includible in income for 2011, and $23,400 ($25,000 - $3,200 + $1,600) will be includible in income for 2012.

No.  It is not possible for you to convert only Traditional IRA basis.  If only a portion of your IRA is converted, the conversion is pro rata representing a portion of the assets subject to taxation and a portion that represents the return of basis.  For purposes of calculating the return of basis, you must treat all of your Traditional and SIMPLE IRAs as one IRA. 

Usually, you may convert your Traditional IRA to your existing Roth IRA.  However, if you prefer, a new Roth IRA may be established to receive the conversion contribution.  Just to be safe, it is best to check with your Roth IRA custodian/trustee for any policies specific to the Roth IRAs held by the custodian/trustee.  Also, certain conversion strategies dictate whether you should convert to an existing or to a newly established Roth IRA.  Check with your financial advisor to determine conversion strategies appropriate for you.

Conversions are taxable (includible in gross income) in the tax year of the distribution from the Traditional IRA, SIMPLE IRA or eligible retirement plan.  If you want the distribution to be taxable in 2009, the distribution that is subsequently converted must be withdrawn on or before December 31, 2009.  However, be sure to check with your IRA custodian/trustee or plan administrator to see if earlier deadlines apply.  Many IRA custodians/trustees and plan administrators set earlier deadlines so that there is adequate time to process conversions by year end.

While distributions received in 2010 may still be converted to Roth IRAs, the conversion amount will be includible for taxable year 2010 or includible in income ratably for tax years 2011 and 2012.

Assets from your 401(k) plan or any other qualifying employer retirement plan (e.g., profit sharing plans, governmental 457(b) plans, 403(b) arrangements, and 403(a) arrangements) may be converted to a Roth IRA either directly or indirectly.

To complete a direct conversion, you instruct the plan administrator of your 401(k) plan to send the distribution to your Roth IRA custodian/trustee.

To complete an indirect conversion, you request the plan administrator to distribute your plan balance to you.  You then have 60 days from the date you receive the distribution to complete the transaction.  When you receive a distribution, the plan administrator is generally required to withhold 20 percent of the eligible rollover distribution for federal income tax withholding purposes.  If you chose the indirect rollover method to complete your Roth conversion, you may, however, make-up the 20 percent withheld amount out-of-pocket and convert the full amount.

There is no limit to the number of Roth IRA conversions that can be done.

Yes.  Assuming you meet the eligibility criteria, you may convert all or a portion of your Traditional IRAs and retirement plans at any time.  Any amount that is converted to a Roth IRA is includible in gross income for the taxable year in which the amount is distributed from the Traditional IRA, SIMPLE IRA or eligible retirement plan.  By converting a portion of your existing retirement assets over several years, you will spread the tax liability over a number of years.

No.  As long as the Roth IRA custodian/trustee is able to hold the type of assets you have in your Traditional IRA, there is no need to liquidate your Traditional IRA investments when converting to a Roth IRA.

Taxes for 2010 Roth IRA conversions are included in gross income ratably over the two-year period unless you make an election not to have the pro rata tax apply. 

If you want to take advantage of the special two-year conversion taxation, the conversion amount must be distributed from the IRA or eligible retirement plan on or before December 31, 2010.  However, be sure to check with your IRA custodian/trustee or plan administrator to see if earlier deadlines apply.  Many IRA custodians/trustees and plan administrators set earlier deadlines so that there is adequate time to process conversions by year end. 

No.  Any amount that is converted to a Roth IRA is includible in gross income for the taxable year in which the amount is distributed from the Traditional IRA, SIMPLE IRA or eligible retirement plan.  If you take a distribution in 2009 that is subsequently converted, the distribution amount must be includible in income for 2009. 

To take advantage of the 2010 special conversion taxation and include the amount ratably for 2011 and 2012, you must withdraw the IRA or retirement plan assets in 2010. 

If you take a distribution of assets you converted in 2010 before 2012 and had elected to pay the taxes in 2011 and 2012, the amount subject to taxation for the year of the distribution will be increased by the amount of the distribution received.  In other words, the ratable conversion taxation is accelerated.  For example, if you convert your $50,000 Traditional IRA to a Roth IRA in March 2010 and choose to pay the taxes ratably in 2011 and 2012, $25,000 is includible in income for both 2011 and 2012.  However, if you take a $5,000 distribution of the converted assets from your Roth IRA in 2010, $5,000 will be includible in income for 2010.  Assuming you take no other distributions of these converted assets before 2012, $25,000 will be includible in income for 2011 and $20,000 ($25,000 - $5,000) will be includible in income for 2012.

Note:  You will also pay a 10 percent penalty on the $5,000 distribution for 2010 unless you meet an early distribution penalty exception.

Potentially, yes.  While the 10 percent early distribution penalty tax does not apply to the assets that are converted to a Roth IRA, the early distribution penalty does apply to other distributions (including amounts withheld for federal income taxes) when then owner is not yet age 59½ and does not meet another penalty exception.

Just like any other retirement plan distribution, amounts withheld for federal income taxes are generally includible in gross income, and are, therefore, taxed.  In addition, if the owner of the assets is not yet age 59½ or older, and does not meet another early distribution penalty exception, the amount withheld for federal income taxes is generally subject to a 10 percent early distribution penalty.

If, within 60 days of distribution, you “make-up” the withholding out-of-pocket and deposit an amount equal to the tax withholding as a conversion contribution, you would avoid the 10 percent early distribution penalty.   

There are no special withholding rules for IRA/plan distributions that are subsequently directly or indirectly converted to Roth IRAs.  Before making any decisions on income tax withholding consult your tax advisor.

For IRAs, the distributing custodian/trustee must furnish you with a withholding notice which notifies you of your right to waive withholding.  You may waive out of withholding or elect to have 10 percent or more withheld from your distribution.  If you do not elect out of withholding or do not elect to have 10 percent or more withheld, the custodian/trustee must withhold 10 percent of the IRA distribution.  Note:  Special withholding rules apply to certain IRAs that have been annuitized. 

For other eligible retirement plans, the withholding rules depend on whether the conversion is handled indirectly or directly.  Eligible rollover distributions (that may ultimately be part of an indirect conversion) paid to you or your spouse, are subject to 20 percent mandatory withholding.  Whereas distributions that are directly converted from the plan to a Roth IRA are not subject to mandatory withholding, even though you and the plan administrator are permitted to enter into a voluntary withholding agreement.

Under federal law, taxpayers have the option of “undoing” a Roth IRA conversion transaction by doing a recharacterization.  When you recharacterize a Roth IRA conversion transaction, you’re essentially electing to put things back to the way they were prior to the conversion.  However, if your entire Roth IRA balance is not being moved to the Traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of your recharacterization.

You must initiate the recharacterization with your Roth IRA custodian/trustee by making an irrevocable election to recharacterize.  The conversion amount that you recharacterize along with any gain or loss attributable to that amount will be directly transferred to your Traditional IRA.

There are no tax or penalty implications associated with recharacterization itself.  For tax purposes, when you recharacterize a conversion contribution the amount recharacterized is treated as if it had never been converted.  However, if your entire Roth IRA balance is not being moved to the Traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of your recharacterization.

The deadline for completing a recharacterization is your tax return due date (including any extensions) for the year of the Roth IRA conversion.  However, if you filed your federal income taxes timely, you have up to six months after your income tax filing deadline to recharacterize.  For example, if you converted to a Roth IRA in 2009 and filed your 2009 federal income tax return on time, you have until October 15, 2010 to recharacterize your 2009 conversion. 

Yes.  All or a portion of a conversion contribution may be recharacterized.  However, it is important to recognize that the net income (or loss) attributable to the recharacterized amount that must accompany the recharacterized portion is calculated as a pro rata portion of the aggregate income earned on the entire Roth IRA during the period the IRA held the contribution.  For more information on partial recharacterizations, see the next question.

Although you may choose which assets go back to the Traditional IRA as part of a recharacterization, doing so will probably not achieve your objective.  When the entire Roth IRA is not being transferred back to the Traditional IRA as part of the reacharacterization and there is more than one investment in the Roth IRA, the net income (loss) attributable (NIA) to the conversion amount being recharacterized must be allocated pro ratably to each investment.  In other words, the NIA is based on the overall dollar amounts contributed, distributed and/or recharacterized.  Dollars or assets in-kind are contributed to an IRA and the investments generate gains or losses.  Once contributions are commingled in an account, these dollars are no longer associated with particular assets.

Example: On January 3, 2010, Susan converts 500 shares of ABC stock valued at $100,000 and 200 shares of XYZ stock valued at $100,000 from her Traditional IRA to a Roth IRA.  No distributions or additional contributions have been made to this Roth IRA at any time.  On March 22, 2011, the value of Susan’s Roth IRA has increased to $220,000 (500 shares of ABC stock valued at $70,000 and 200 shares of XYZ stock valued at $150,000).  In this scenario, if Susan chooses to move the underperforming ABC stock (500 shares) back to the Traditional IRA as a recharacterization, she must also transfer an additional $7,000 NIA.  Also, by recharacterizing only $70,000, the conversion/recharacterization of the ABC stock will force her to include $130,000 in income as part of the conversion.

An ineligible conversion becomes a failed conversion if you do not correct it on time.  Failed conversions are considered to be annual Roth IRA contributions for the tax year of the conversion.  If the amount exceeds your allowable contribution limit, it is then treated as an excess Roth IRA contribution.  See the next question for information on how to correct an ineligible conversion.

An ineligible conversion occurs when you have MAGI in excess of $100,000 (2009 only); are married, filing a separate tax return (2009 only); or you prematurely reconvert assets previously converted and recharacterized.  See “Can I reconvert assets that I have previously converted and recharacterized?” for reconversion timing requirements.

To avoid a failed conversion, an ineligible conversion must be timely recharacterized.  See “How do I recharacterize a conversion?” and “What is the deadline for recharacterizing a conversion?” for more information on recharacterizations.

Yes.  Recharacterizations are reported by both the Traditional and Roth IRA custodian(s)/trustee(s).  In addition, you must generally report recharacterizations to the IRS by attaching a statement to your Form 1040.  You may also need to file Form 8606, Nondeductible IRAs, with your income taxes.  For assistance with recharacterizations, refer to IRS Publication 590 and/or your tax advisor.

Yes.  You may reconvert assets that have been previously converted and recharacterized.  However, a reconversion must occur in a subsequent year to the prior conversion, or if later, after 30 days have elapsed since the recharacterization.

If you change your mind after completing a Roth IRA conversion, within a limited period of time, you may elect to “recharacterize” all or a portion of an amount that you converted.  When you elect to recharacterize, you redeposit the converted assets into a Traditional IRA and, if the entire conversion amount is recharacterized, it will nullify any of the tax consequences of the initial conversion transaction.  However, if your entire Roth IRA balance is not being moved to the Traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of your recharacterization. 

You may elect to “recharacterize” the Roth IRA conversion transaction.  When you elect to recharacterize a Roth IRA conversion, the converted assets are redeposited into a Traditional IRA nullifying the tax consequences of the initial conversion transaction.  However, if your entire Roth IRA balance is not being moved to the Traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of your recharacterization.