section 1 - The American College Online Learning Center

(3) The single taxpayer contribution is phased out on a pro rata basis with AGIbetween $110,000 to $125,000 (2012)(4) The married filing jointly contribution is phased out with AGI between$173,000 and $183,000.e. Eligibility for a Roth Conversion(1) All taxpayers are eligible for Roth IRA conversions regardless of earnings.(a) A participant can convert any portion of a traditional IRA or a SEPIRA/SIMPLE IRA to a Roth IRA (after two years).(b) A participant or beneficiary can convert any portion of a qualifiedplan (if plan allows distributions), a 403(b) plan or a governmentsponsored 457(b) plan into a Roth IRA.(c) Planning Point: Death beneficiaries have the ability to do Rothconversions from a qualified plan, 403(b), or 457 plan, but not froman IRA, SEP, or SIMPLE.(2) Participants of any age can convert to a Roth IRA(a) If conversions occur prior to age 59½, withdrawals from the RothIRA within 5 years and before attainment of age 59½ will be subjectto the early withdrawal penalty tax (exceptions may still apply).(b) If conversions occur after attainment of 70½, the participant cannotconvert the amount subject to the required minimum distributionfor the year.(3) Conversion rules(a) Partial Roth IRA conversions are allowed.(b) Conversions for a tax year must occur by December 31 of that year.(4) Tax treatment of a conversion(a) A conversion requires the payment of income tax, treating theconversion as a withdrawal from the traditional IRA, except thatthe 10% early withdrawal penalty tax does not apply at the timeof the conversion.(b) The value that is taxed is based on fair market value on the date ofconversion. If an annuity is involved there are some complicatedrules regarding the valuation of certain annuity benefits. The carrierwill be required to provide a valuation for tax purposes.(c) If there is no cost basis in any IRAs, the entire value is includibleas taxable income.(d) If there is a cost basis (nondeductible contributions or after-taxcontributions that were rolled over) in any IRA, the client will needto add all IRAs together and determine the tax using a pro rata rule.(e) Example: Cheryl has a $23,000 IRA that includes $18,000 ofnondeductible contributions that she wants to convert. She also hasfully taxable $100,000 rollover IRA. Tax-free portion of conversion:$23,000 x $18,000/$123,000 = $3,366 Cheryl pays tax on $19,634!(f) Planning Point: The pro rata rule has an impact on any partialconversion or if there are multiple IRAs—effectively you cannot3.10