Ira Conversion Rules

An IRA is an individual retirement account or tax shelter allowed by the US government. The main types of IRAs include the SEP, ROTH, SIMPLE and the 401k. The SEP (Simplified Employee Pension) is for self-employed individuals and small business owners; while the SIMPLE (Savings Incentive Match Plan for Employees) is designed for small businesses. The 401k IRA is an employer-sponsored programs provided as benefits to employees.

People usually choose to convert their regular IRAs to ROTH IRAs. The ROTH IRA has more financial advantages which are often highlighted by investment consultants. IRA conversion rules have to be observed. There are three methods of IRA conversion allowed by the IRS – rollovers, transfers between the same trustees and trustee-to-trustee transfers.

The current IRA conversion rules imposed a income limit for ROTH IRA conversions. If the MAGI (modified adjusted gross income) exceeds USD 100,000, conversion to ROTH is not permissible. Married taxpayers who file separate tax returns are not eligible for ROTH IRA conversions either. For IRA conversions, the 10% early withdrawal penalty is not imposed.

Some people wish to convert their 401k IRA when they join a new employer. However the IRS will not approve IRA conversions for taxpayers whose MAGI exceed USD 100,000 for that year. SIMPLE IRAs can be converted to ROTH IRAs, however IRA conversion rules stipulate that the individual must have participated in the plan for at least two years before conversion.

The IRA conversion deadline is December 31 of each year. Once a conversion has been completed, the individual can choose to reverse that conversion. This is termed as conversion recharacterization and involves paperwork transaction. The deadline is up to October 15 of the following year.

New IRA conversion rules come into force in 2010. The limit of MAGI (modified adjusted gross income) on IRA conversions to ROTH is removed. Married taxpayers who file separate tax returns can apply for ROTH IRAs. In short, anyone can convert their standard IRAs to a ROTH IRA. Furthermore, for conversions in 2010, the tax on the conversion income can be taxed over two years, that is 2011 and 2012.