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Partial Roth Conversions – How Do They Work?

Can I Convert and How Does That Work?

If you have a Traditional IRA, then it is now possible to convert your account into a Roth IRA, where the future dividends can be earned tax-free. As of this writing, there are no penalties for converting funds from a traditional account into a Roth plan regardless of your Adjusted Gross Income. However, on the amount of money converted, taxes must be paid ‘out of pocket’ by an individual based on their current federal income tax rate. Needless to say, this may create quite a large additional tax burden for an individual all at once. The solution for such an individual might be what is known as a partial conversion strategy.

What is a Partial Conversion?

One way to reduce the amount of taxes that you will have to pay is by doing partial conversions. You are allowed to convert as much or as little Traditional money to Roth as you want. For instance, let’s say you have a $40,000 Traditional IRA that you wish to convert to a Roth. Instead of converting the full $40,000 and having to pay all the taxes in that year, you could convert just $10,000 per year for the next four years, reducing the amount of taxes you have to pay for the given year.

What Are The Likely Candidates For a Conversion?

It is possible to convert your Traditional IRA to a Roth IRA, but as previously mentioned it is not always a good idea because of possible tax consequences.  Here is a list of likely candidates for such a transaction:

  • Younger individuals with smaller balances
  • Individuals in a lower income tax bracket
  • Individuals who need flexible access to their retirement plan assets
  • Individuals who have a large amount of basis (non-deductible Traditional IRA contributions)
  • 
Individuals who are not eligible to contribute to a Roth IRA
Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.