The Lowdown on Roth IRA Conversions

So let's say converting to a Roth still sounds pretty good. To do so, your modified adjusted gross income must be $100,000 or less, regardless of whether you file singly or jointly. (The conversion amount does not count toward the $100,000 cap, but it does increase your income for the year for regular tax purposes.) But here's the main concern: You'll need to pay tax on that $35,000 now. You absolutely should not roll that money into a Roth unless you have outside funds to pay that tax -- taking money from the IRA itself to pay the tax on the conversion is self-defeating.

As for withdrawals for higher education, you've already paid tax on the money you contributed to a Roth, so you're always allowed to withdraw any amount up to what you put in without paying tax or penalty. If you want to withdraw any gains to pay for higher education expenses, though, the rules are the same as for withdrawing from a traditional IRA: You'll owe income tax on the gain, but the distribution will not be subject to the 10% penalty.

Hello Beverly,

Say an investor has $10,000 in a traditional IRA and wants to convert this amount to a Roth IRA. Can a portion of the total amount (say $5,000) be converted in one year, then the rest converted in another year? Or must the entire conversion (traditional IRA to Roth IRA) occur in one tax year?

The IRS Web site seems to imply the entire amount must be converted (no surprise there), but I've read implications of being able to do a partial conversion of a traditional IRA to a Roth IRA. Partial conversions help people who want to convert but not bump themselves into the next higher tax bracket.

If you'll possibly be covering this issue in one of your future TheStreet.com columns, I'll be on the lookout for it.

Thanks in advance for answering this question,

Jay Heney

I'm not sure what part of the IRS Web site you were reading, but you absolutely are able to convert just part of a traditional IRA into a Roth account. Indeed, this is a very smart strategy for investors who want to convert to a Roth but don't have the outside funds to pay the tax on the conversion. By converting a series of smaller amounts, you can minimize the tax hit in any given year.

You have two options for executing your partial conversion: You can do a trustee-to-trustee transfer, or withdraw and redeposit the funds yourself. Trustee-to-trustee transfers are preferable, largely because they're more streamlined, and you don't run the risk of a penalty. All you do is alert the trustee of your traditional IRA (be it a brokerage, fund company or bank) that you want to roll part of your IRA (in this case, $5,000) into a Roth.

If you want the same trustee to hold your Roth, the transaction should be completed almost immediately. If you want another trustee to be the custodian of your Roth, the trustee of your traditional IRA will transmit the funds you want to convert directly to the trustee of the Roth account.