Converting a SIMPLE IRA to a Roth IRA

From smSmallBiz

Question:

I have a SIMPLE IRA that I want to transfer to a Roth IRA, what are the qualifications for doing so? —Carolyn Damon, Cincinnati, Ohio

Answer:

This year, people who earn an adjusted gross income of $100,000 or less can convert qualified individual retirement accounts like the Savings Incentive Match Plan for Employees, or"SIMPLE IRA," to"Roth IRAs," says Joseph A. Leonard, a retirement industry consultant at Coastal Investment Advisors, a financial advisory firm in Southport, N.C. If you make any more than that, then it pays to wait.

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Send us an email and we’ll try to answer it for you. Due to the volume of questions we receive, we are not able to answer all questions. Questions that are selected for publication may be edited for length and clarity. For 2010, that income threshold will completely disappear."Next year, you can make unlimited amounts of money and still convert — for one year only," says Leonard. And while those making the switch will have to pay income taxes on the funds they transfer, they can lessen the blow by splitting their tax liability between 2011 and 2012.

Despite potentially getting saddled with a tax hit sooner than some would like, the benefits of converting to Roth IRAs can be substantial, says Leonard. Not only can Roth account holders (or their beneficiaries) avoid paying taxes on all the earnings generated in the account, there’s no early distribution penalty on certain withdrawals. Also, owners aren’t required to take minimum distributions, which is the standard for those aged 70½ or older in other retirement plans.

(For more on Roth IRA rollovers, see IRS publication 590 and our story.)