Roth Conversion Basics
What is a Roth conversion?
A taxable distribution from a non-Roth IRA (traditional, rollover, SEP or SIMPLE, or from a non-Roth employer-sponsored plan (401(K), 403(b)(7)) that is rolled over to a Roth IRA as a direct transfer or within 60 days from the date the distribution is received by the client (indirect rollover).
What form reports money leaving the pre-tax IRA.
1099-R
If the client chooses to withhold, where does that money come from?
Settlement fund
What is pro-rata?
When clients have both pre-tax and after-tax assets in their non-Roth IRA(s) those assets are comingled, and subsequent distributions (including conversions) are subject to the pro-rata rule. Pro-rata is a term used to describe the taxability of IRA distributions that include both pre-tax dollars (deductible contributions, pre-tax rollovers, growth) and after-tax dollars (nondeductible, after-tax rollovers).
Why does a client have to take their RMD before doing a roth conversion?
RMDs cannot be converted. Since the IRS considers the first distribution in any year to apply toward the RMD for that year, the client must satisfy their RMD before the client converts assets. (FIRM: First Is Required Minimum)
What three things will we preface before each conversion?
1. IRREVERSABLE: once this transaction is submitted it cannot be canceled or recharacterized
2. TAXABLE EVENT: the conversion is reportable as income and fully taxable in the calendar year in which it is completed.
3. RMD- if client is RMD age, make sure it is taken (at all firms) before proceeding with conversion
What form shows money going INTO the Roth IRA, and which section would report the conversion.
Form 5498, box 3 shows conversion. If that information is missing (due to mid-air) the clients may have it under box 2 (rollover) instead
If the client has no funds available in the settlement fund, what will happen to the form they submit? What trade date would they now recieve.
The Intelledox would get a NIGO. Client's closing price of the day it is received IGO
Why can't a client have one traditional IRA with all pre-tax money and another with all post-tax money?
Aggregate- The IRS combines all of your IRAs together and treats them like one account when determining taxes (you are your ssn). This is across ALL institutions and pre-tax IRA's. The funds are considered COMINGLED and cannot be separated for tax purposes
What happens if a client forgets to take their RMD and converts it instead?
If an individual converts to a Roth IRA prior to satisfying their RMD, the amount of the RMD would be considered a contribution to the Roth IRA and NOT conversion. If they are not eligible to make a Roth IRA contribution, it must be removed as an excess contribution from the Roth IRA. Otherwise they may be subject to a 6% over contribution penalty.
What is the main long-term benefit clients are typically seeking when they complete a Roth conversion?
Clients may complete a Roth Conversion if they are expecting higher future taxes, want tax-free retirement income, no/lower RMDs, tax free inheritance, etc.
What is a potential consequence of withholding during a Roth Conversion?
Tax withholding portion is NOT converted, it is treated as a ditribution. If under age 59.5 they may be subject to a 10% penalty. Withholding increases the client's taxable income.
If client wants 10,000 total of VFIAX in their SEP IRA to be converted, with 10% withholding for federal, and 2% withholding for state- how much needs to be available in settlement? What number would we enter on the intelledox?
1200 in settlement fund, 8800 enter on form
What is a backdoor backdoor conversion? Why is it different from a roth conversion?
"Backdoor Roth IRA" is a term that describes a strategy used by high-income earners who can't contribute to a Roth IRA because their income is above certain limits. Rather than contributing directly to a Roth, the backdoor strategy calls for contributing after-tax money to a traditonal IRA and then converting it. A roth-conversion can be for anyone and is usuallyh pre-tax money, where as a backdoor is for high income earners!
What is the standrad process when a client wants to move employer plan assets into a Roth IRA? What tax forms would they get?
To avoid mid-air conversion, we would do a direct rollover into a pre-tax IRA FIRST and then do a roth conversion. This way the client would get a 1099-R and a form 5498.
Why would a client choose to do their conversion right away after making a non-deductible contribution and how long do they have to wait after making a contribution from a bank?
Any earnings that occur before conversion are pre-tax and taxable. Waiting to convert allows interest/gains to build which can increase taxable income. 7 day uncollected funds period means they will have to wait 7 days for the funds to clear before proceeding with the conversion.
What form reports non-deductible contributions and conversions? Who provides it?
Form 8606, they would work with their tax professional to fill out the IRS form, Vanguard will not provide this for them. Client will keep track of this on their own.
If a client wants to convert 12,500 of VOO, with 22% federal withholding, and 5% state withholding, what amount needs to be available in settlement? What amount do we enter on the form?
4623.28 in settlement, 12,500 on form
What is a mega backdoor?
A mega backdoor Roth IRA conversion takes advantage of the IRS's total 401(k) contribution limit. While your regular 401(k) contributions are capped at $24,500 in 2026 ($32,500 if you’re 50 or older), the IRS allows total annual contributions—including employee deferrals, employer matches, and after-tax contributions—of up to $72,000 total ($80,000 if 50 or older).2
This creates a "mega" opportunity because if your 401(k) plan allows it, you can make large after-tax contributions through payroll deductions that far exceed the $7,500 IRA limit. To take advantage of this strategy, your plan must allow after-tax contributions and conversions. Check with your plan administrator.
What trade date will the client get if we use LEGACY and convert in DOLLARS before 4pm EST.
PRIOR day's trade date
What is the reason a Roth conversion increases a client’s taxable income in the year it is completed? Is this a potential downside, why?
The conversion takes pre-tax or untaxed retirement assets and treats them as distributed income in the year of the conversion, adding that amount to the client’s ordinary income and potentially affecting their marginal tax bracket, withholding requirements, and overall tax liability. It can affect benefits like IRMAA and Medicare because the income of the RMD may bump them into a higher tax bracket.
What is a mid air conversion? How is this reported?
401(k) /pretax IRAfunds roll directly into a Roth IRA in one step (instead of opening a rollover/trad FIRST and THEN converting assets). Vanguard will NOT provide the client with a 1099, which is why we do not encourage this option. They would be responsible for SELF REPORTING their conversion with their tax professional.
Client wants to convert 50,000 from their settlement but also wants to withhold 12% for federal taxes and 6% of state tax- how much needs to be available in the settlement fund before they do the conversion?
60,975.61
What extra steps would a client have to take if they are doing a backdoor roth? What happens if they do the contribution in 2026 and then the conversion in 2027?
File form 8606 to report non deductible contribution to a pre-tax IRA. The client would have to fill out this form in 2026 to report the nondeductible contribution, and again in 2027 to report the conversion using the after tax $. If both are completed in the same calendar year they can just file one!
What trade date would the client get if we went through the MODERN pathway using SHARES
same day if submitted before 4pm EST, next day if submitted after 4pm EST