Note: This article lays out the necessary steps your client needs to take in order to convert to a Roth IRA.
Once you have decided that converting to a Roth IRA is an appropriate tax strategy, how do you do it? Converting is different than contributing. The only limit on converting is the value of your current IRAs and other retirement accounts. The IRS does not have any dollar limits for a Roth IRA conversion. In order to do the conversion, it must be completed by December 31st of the year of conversion. For example, if you are converting in 2010, it must be completed by December 31, 2010. Converting can be more involved than contributing in some cases, and easier in other cases. The steps to convert are as follows:
First, you will need to decide how much to convert. For example, you have $350,000 in retirement accounts that are invested in several companies and banks which all could be converted. But after consulting with your tax preparer, CPA, and /or financial advisor, you have decided to convert only $20,000 into a Roth IRA in 2010.
Next, you have to decide which investment to use for the conversion.
1) If you are doing the conversion yourself, decide on which investment to transfer, contact the company (or companies), and tell them that you want to convert the specific dollar amount to a Roth IRA. Make sure to ask what their procedures are before completing the conversion. The following are some questions you should ask:
a) How long will it take to do the conversion?
b) Are there any fees for the conversion?
c) Do you allow a partial conversion if my existing account's value is more than the specific dollar amount you wish to convert?
2) If you use a financial advisor, then you and your advisor will determine which investment to use to make the conversion. Typically, your advisor will take care of all the paperwork for the conversion.
The most common question I am asked is, "What if I have a Certificate of Deposit (CD) that pays 5.5 percent interest? Will I get that much interest if I convert?" Usually, the bank will just change the title of the account from an IRA to a Roth IRA and that should not change the interest rate. But make sure you verify that fact with the bank before converting. Be extra careful if you are not changing the full amount of the IRA to a Roth IRA. Doing so may constitute a modification of the terms of the account, and interest may change and even cause a penalty on early withdrawal of the CD. In this case you may have to decide to do a complete conversion or use a different IRA account for conversion.
If your IRA is invested in an annuity, make sure the conversion does not change the rate or features of the annuity. In addition, if your annuity has living or death benefit riders, you will need to request the conversion value from the annuity company.
In these cases, you may want written confirmation of the company policy.
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