IRA Alert

Ed Slott

What can't be converted to a Roth

72(t) payments, hardship distributions among items ineligible for conversion

Apr 4, 2010 @ 12:01 am

By Ed Slott

Unfortunately, many individuals are getting confused. They think that just because income restrictions have been lifted and anyone can convert to a Roth IRA in 2010, it means that anyone can convert anything. Not so.

The tax code allows only eligible rollover distributions to be converted to Roth individual retirement accounts. That means that besides required minimum distributions, there are a number of other items that can't be converted. These include 72(t) payments, hardship distributions, corrective distributions of excess deferrals, deemed distributions (i.e., defaulted plan loans, though plan loan offsets are eligible for rollover) and dividends from employer securities. In addition, funds in an inherited IRA are not eligible to be converted to a Roth IRA.

How about cash? You can't simply take $100,000 from the bank or from the sale of an asset and convert it to a Roth IRA; that $100,000 is not an eligible rollover distribution. You may be able to contribute up to $5,000 per year ($6,000 if 50 or older) to a Roth IRA, but you must have earned income, and there are income limitations (even though no such limitations apply to making contributions to a traditional IRA). Although the Roth IRA conversion limits have been repealed, the Roth contribution limits are still in effect.

The phaseout income limits for a 2010 Roth IRA contribution are $167,000 to $177,000 for married-joint filers and $105,000 to $120,000 for individuals. Clients still have up to April 15 to contribute to a 2009 Roth IRA. The phaseout income limits for a 2009 Roth IRA contribution are $166,000 to $176,000 for married-joint filers and $105,000 to $120,000 for individuals.

If your clients' income exceeds the Roth contribution income eligibility limits and they want that $5,000 (or $6,000) in a Roth, they can easily bypass those limits by first contributing the funds to traditional IRAs (if they are under 701/2 and have earned income) and then converting those funds to Roth IRAs. Funds can be converted to Roth IRAs as soon as they are contributed to traditional IRAs. There is no holding period.

Regardless of where they come from, though, if excess or ineligible amounts end up in Roth IRAs, they will be subject to the 6% excise tax for excess contributions for each year they remain there.

High-income retirees who for the first time qualify for a Roth conversion have to be careful not to act too quickly. In their haste to convert, some IRA owners might convert their entire account balances not knowing that their RMDs cannot be converted to Roth IRAs. Individuals 701/2 or older in 2010 must first take their 2010 RMDs if they plan to convert all their IRAs to Roth IRAs. The first dollars withdrawn from an IRA are deemed to be the RMD until that amount is satisfied. Once the RMD is withdrawn, the remaining IRA balance can be converted.

Mistakenly “converting” an RMD could result in an excess contribution to the Roth and would result in a 6% excise penalty for each year it remained in the account. The RMD funds withdrawn, though, can be used to contribute to a Roth IRA if the IRA owner qualifies to make a Roth IRA contribution. But that contribution is limited to $6,000. The RMD can also be used as a source to help pay the tax on the conversion of the remainder of the IRA account(s).

Starting in 2010, any non-spouse beneficiary who inherits a qualified plan is eligible to convert that plan to an inherited Roth IRA, and the plan must allow this transfer. Before 2010, the plan did not have to allow the transfer, even though the law allowed the post-death conversion. This conversion must be done by a direct transfer, as non-spouse beneficiaries can never do 60-day rollovers. But while a non-spouse beneficiary who inherits a qualified plan can convert to an inherited Roth IRA, if the same beneficiary inherits an IRA, he or she cannot convert it to an inherited Roth IRA.

A non-spouse plan beneficiary who converts inherited plan balances to an inherited Roth IRA must be aware that the funds cannot go into his or her own Roth IRA. They must go to a properly titled inherited Roth IRA. The name of the deceased plan participant must be in the title of the account, and the title must also indicate that it is an inherited Roth IRA. In addition, the beneficiary cannot make contributions to this inherited Roth IRA.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA to help advisers and insurance companies become recognized leaders in the IRA marketplace. He can be reached at

For archived columns, go to


What do you think?

View comments

Recommended for you

Upcoming Event

Mar 13



Mopedia is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

What are the big international hotspots and how could it affect advisers and investors. Gen. Martin Dempsey, the former chairman of the joinst chiefs of staff, offers his unique perspective.

Video Spotlight

Sponsored by Prudential

Recommended Video


Latest news & opinion

Tax update: Brady says sales tax deduction in final bill

Taxpayers will be able to deduct state income taxes or state sales taxes in addition to property levies — up to a $10,000 cap.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

Advisers' biggest fears for 2018

What keeps advisers up at night.


Subscribe and Save 60%

Last News

eaton vance floating rate a starting salary for financial planner 16pf online test templeton total return fund hewitt financial services reviews cost of h&r block tax preparation hewitt resources 3m borrowing against life insurance good idea allstate comprehensive turbotax prices 2014 the dow average stocks that don t pay dividends vanguard total international stock index fund what is the most valuable dime mutual funds for rising interest rates how to invest in liquid mutual funds allianz global investors center for behavioral finance how do i legally separate from my spouse investing in annuities pros and cons legal definition cease and desist order social security benefits for surviving spouse and child bank of america merrill lynch san francisco taxact vs turbo tax fidelity us equity fund stocks with best dividends personal loan interest tax exemption schwab us treasury money fund morgan stanley investment management wiki 401k successor plan rules do widows get social security merrill edge trading platform charizard first edition how to tell most valuable american coin oppenheimer global equity portfolio