Roth Conversions Might Be Silver Lining Amid Volatility

In general, you can transfer all or a portion of Traditional IRA funds to a Roth IRA – this is considered a Roth Conversion.

Timing is important because the amount converted is added to your gross income in the year of the conversion. Traditional IRAs that have experienced a steep decline in value might present an opportunity to transfer some or all of the assets to a Roth IRA with the intention of paying taxes now to potentially save in taxes later.

Anyone can convert a Traditional IRA to a Roth IRA in 2022. There are no income limits, or restrictions based on your tax filing status. You generally have to include the amount you convert in your gross income for the year of conversion, but any nondeductible contributions you’ve made to your traditional IRA won’t be taxed when you convert.

Converting is easy. You simply notify your IRA provider that you want to convert all or part of your existing traditional IRA to a Roth IRA, and they’ll provide you with the necessary paperwork to complete. You can also transfer or roll your assets over to a new IRA provider.

The conversion rules can also be used to allow you to contribute to a Roth IRA in 2022 if you wouldn’t otherwise be able to make regular annual contributions because of the income limits (sometimes called a “back door” Roth IRA). (In 2022, you can’t contribute to a Roth IRA if you earn $214,000 or more and are married filing jointly, or if you’re single and earn $144,000 or more.) You can simply make a nondeductible 2022 contribution to a traditional IRA, and then convert that traditional IRA to a Roth IRA. You can contribute up to $6,000 to a traditional IRA in 2022, $7,000 if you’re 50 or older.

Remember that you can also convert SEP IRAs, and SIMPLE IRAs that are at least two years old, to Roth IRAs. And, if you’re eligible for a distribution from your employer retirement plan [for example, a 401(k) or 403(b) plan], you may be eligible to transfer or roll those distributions over to a Roth IRA as well.

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