ARTICLE TAKEAWAYS
Roth conversions
A conversion is an irrevocable, reportable movement of assets from an existing traditional IRA to a Roth IRA. Eligible assets can be converted even if the client is not eligible to make a Roth IRA contribution due to their modified adjusted gross income or tax-filing status.
IRA assets that are eligible to be converted to a Roth IRA:
IRA assets that are ineligible to be converted to a Roth IRA:
* SIMPLE IRA and SIMPLE IRA Plus may only be converted starting 2 years after the client’s first contribution.
Process:
To convert a Capital Bank and Trust Company (CB&T) IRA to an existing Roth IRA, you can request the conversion by contacting us. If the Roth is a new account, complete the Roth IRA Request for Conversion along with the Traditional/Roth IRA Application.
To convert a non-CB&T IRA to a CB&T Roth IRA, contact the resigning trustee to determine who will be reporting the conversion — the resigning firm or CB&T:
Timing and deadlines:
Requests are generally processed within 1–3 business days of receiving them, if all of the necessary information has been provided.
For a conversion to be effective for a specific calendar year, the distribution must take place on or before December 31 of that calendar year.
Tax treatment:
The total conversion amount is taxable unless the investor has made any non-deductible IRA contributions. Having multiple IRAs will affect the amount of the conversion that is considered taxable, even if only a portion of the assets are converting.
The Internal Revenue Service requires that the tax calculation accounts for the value of all your client’s IRA assets (traditional, SEP/SARSEP and SIMPLE IRAs) owned on December 31 of the conversion year. Consult a tax advisor for your client’s specific scenario.
Additional tax considerations:
Any taxes withheld at the time of the conversion may also be subject to an early distribution penalty if the investor is under age 59½ and no exceptions apply.
Assets converted to a Roth IRA are subject to the Roth distribution rules. View Roth IRA tax information for additional details.
Form 1099-R reports the amount of the conversion distribution, and Form 5498 reports the conversion contribution.
Recharacterization of an IRA contribution
IRA owners who want to change the nature of an IRA contribution can move the contribution, adjusted for earnings or losses, from one type of IRA to another. A traditional IRA contribution can be recharacterized to a Roth IRA contribution or vice versa.
When a contribution is recharacterized, the amount, including adjustments for earnings or losses, is moved to the other type of IRA.
For specific details regarding eligibility, consult a tax advisor.
Process:
Submit the Traditional and Roth IRA Recharacterization Request to process a recharacterization. If recharacterizing into a new account, complete the recharacterization form along with the Traditional/Roth IRA Application.
Timing and deadlines:
Requests are generally processed the day they are received, if all of the necessary information has been provided.
The deadline for processing a recharacterization is the IRA owner’s tax-filing deadline plus extensions, typically October 15.
Tax treatment:
A recharacterized contribution is considered to have been made to the receiving IRA and falls under the receiving IRA tax guidelines, Roth or traditional.
Form 1099-R reports the amount of the recharacterization distribution, and Form 5498 reports the recharacterization contribution.
Note: The amount recharacterized may be different than the amount originally contributed. Earnings and losses are calculated for the entire account, not just a specific investment. As a result, the appreciation or depreciation of all funds in the account is included in the earnings calculation.
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